STJ ST. Jude Medical, Inc.

Leading medical devices company Medtronic (MDT) is expected to report second quarter fiscal 2012 results before the market opens on Tuesday, November 22, 2011. The company is expected to earn an EPS of 82 cents on revenues of $4.066 billion during the quarter, according to the Zacks Consensus Estimate.

Medtronic met its expectations in the first quarter of fiscal 2012. The four-quarter positive surprise of 0.54% implies that the company has surpassed the Zacks Consensus Estimate by this magnitude over the last four quarters.

Previous Quarter Highlights

Medtronic reported an adjusted EPS of 79 cents in the first quarter of fiscal 2012, in line with the Zacks Consensus Estimate and a penny lower than the first quarter of fiscal 2011.  Revenues were $4.049 billion in the quarter, up 7% (up 2% at constant exchange rates or CER) year over year and higher than the Zacks Consensus Estimate of $3.991 billion.

Medtronic’s seven divisions – Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control – generated corresponding sales of $1.253 billion (up 2% year over year but down 3% at CER), $825 million (flat or down 3% at CER), $850 million (up 19% or 11% at CER), $397 million (up 7% or 4% at CER), $355 million (up 14% or 9% at CER), $266 million (up 13% or 9% at CER) and $103 million (up 23% or 17% at CER).

Agreement of Estimate Revisions

Over the past month, out of the 19 analysts covering the stock, 4 have lowered their estimates  for the second quarter with none moving in the opposite direction. In the last 7 days, 1 analyst reduced his/her estimate for the quarter.

The biggest segment of Medtronic, CRDM continues to witness several headwinds since the past few quarters. The US ICD market continues to be affected by a number of challenges, namely the adverse Journal of the American Medical Association (JAMA) article published in January 2011 and the Department of Justice (DOJ) investigation of hospitals. Medtronic’s competitors, Boston Scientific (BSX) and St Jude Medical (STJ), also face a similar situation and are trying to increase their respective market share amidst declining ICD market growth.

Moreover, the Spinal segment is also under the scanner as several questions have been raised regarding Medtronic’s recombinant bone morphogenic protein-2 (rhBMP-2) in the recent past. Pricing pressure and economic uncertainty in the US and Europe are taking a toll on the medical devices industry, as reflected in recent earnings releases.

We also expect an update regarding the US trial of Medtronic’s CoreValve system. This is significant since Edwards Lifesciences (EW) has recently received approval from the US Food and Drug Administration (FDA) for its Sapien transcatheter heart valve.

Although recent product launches in the CRDM business will provide some incremental sales, Medtronic’s top line would continue to remain under pressure. This might force the company to revise its guidance for fiscal 2012. However, the continuous share buyback program and restructuring initiatives undertaken by the company might act as some cushion to the bottom line.

Magnitude of Estimate Revisions

Given nominal estimate revisions from the analyst community over the past 7 and 30-day periods, the consensus estimate for the current quarter has remained static at 82 cents over the last 60 days. However, the consensus estimate for fiscal 2012 has dropped by a penny to $3.44 over the past month.

Our Take

We believe Medtronic’s recent decision to divest the Physio-Control business is a good move as it will help it to focus on its core segments. Besides, the divestiture of this low-margined business would also aid the company’s financials.

Having witnessed several headwinds in its two biggest segments – CRDM and Spinal – Medtronic is trying every means to revive growth. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term.

We currently have a Neutral recommendation on Medtronic, which also corresponds to the Zacks #3 Rank (Hold) in the short term.

 
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