STJ ST. Jude Medical, Inc.

Medtronic Inc. (MDT) reported an adjusted EPS of 84 cents in the third quarter of fiscal 2012, in line with the Zacks Consensus Estimate, but a couple of cents behind the year-ago quarter.  

Revenues were $4.029 billion in the quarter, at par with the Zacks Consensus Estimate.  However, after adjusting for revenues from the Physio-Control business, which is now treated as discontinued operations, revenues came in at $3.918 billion, up 2% year over year (1% at constant exchange rates or CER).

Medtronic recorded 45% of its total sales from the international market during the quarter, which climbed 7% year over year (6% at CER) to reach $1.773 billion. As a result of the company’s focus on emerging markets, revenues from these regions increased 15% (16% at CER) to $395 million.

Segment Details

Medtronic earns revenues from the following divisions – Cardiac Rhythm Disease Management (“CRDM”), Spinal, CardioVascular, Neuromodulation, Diabetes, and Surgical Technologies. During the quarter, these segments generated corresponding sales of $1.192 billion (down 2% year over year or down 3% at CER), $784 million (down 9% or down 10% at CER), $837 million (up 8% reported as well as at CER), $419 million (up 4% reported as well as at CER), $367 million (up 8% reported as well as at CER), and $319 million (up 23% or 22% at CER).

Maintaining the lackluster trend seen in the past few quarters, CRDM continues to disappoint. Although pacing systems increased 3% at CER to $467 million, defibrillator sales declined 9% at CER to $674 million. CRDM sales were affected by declining procedure volume, partially offset by growth of AF solutions.

While revenues from Core Spinal dropped 6% at CER to $596 million, Biologics declined 20% at CER to $188 million. The downside in Biologics was due to continuous declines in the sales of Infuse (following the publication of articles in The Spine Journal), partially offset by revenue growth from Other Biologic products.

Revenue growth in the CardioVascular segment was driven by robust performance in all three businesses. Within this segment, revenues from Coronary, Structural Heart, and Endovascular & Peripheral businesses increased 3% ($382 million), 10% ($265 million) and 17% ($190 million), respectively.

Endovascular and Peripheral revenue was driven by successful penetration of the Endurant stent graft for the treatment of abdominal aortic aneurysms. In Structural Heart, transcatheter valves continued to show strong growth.

Margins

Gross margin during the reported quarter increased 45 basis points (bps) to 76.2%. Moreover, operating margin improved 100 bps year over year to 31.9% with both selling, general and administrative expenses and research and development expenses remaining almost unchanged.

Guidance

Medtronic reiterated its revenue outlook for fiscal 2012. The company, however, tightened its adjusted EPS guidance to $3.44−$3.47 (previous guidance of $3.43−$3.50), which considers 4−6 cents of dilution from the Ardian acquisition. After adjusting for Ardian dilution and 10 cents of one-time tax benefits received in fiscal 2011, the company expects to report a 7−8% (6−9%) growth in EPS.

Our Take

We are disappointed with the company’s performance during the reported quarter on the revenue front. Having witnessed disappointing performance from the 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. Moreover, acquisitions done over the past few years are contributing to total revenues, a positive trend that is expected to continue. Meanwhile, Medtronic has increased its focus on the emerging markets that have been garnering significant growth.

Despite these measures, economic uncertainty is impacting procedure volume. Medtronic’s competitors, Boston Scientific (BSX) and St Jude Medical (STJ), also face a similar situation. Longer term, we have a Neutral recommendation on Medtronic.

The stock retains a Zacks #3 Rank (“Hold”) in the short term.

 
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