Leading medical devices company, Medtronic (MDT), is expected to report its first-quarter fiscal 2011 results before the market opens on Tuesday, August 24, 2010.
Medtronic has provided guidance for the first quarter of 2011. Revenues and EPS are expected in the range of $3.86-$3.96 billion and 79-81 cents, respectively. If revenues and EPS meet expectations, it will represent a growth of 5-8% at constant exchange rates (CER) and 10-13%, respectively.
The current Zacks Consensus Estimate for the first-quarter EPS is 82 cents, which represents an increase of 3.8% from the year-ago quarter. Medtronic has surpassed expectations over the trailing four quarters with a four-quarter positive surprise of 1.95%. This means that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.
Based on this favorable trend, there is a high probability that Medtronic will exceed estimates in the upcoming quarter. In addition, the Zacks Consensus Estimate for revenue is $3.95 billion, almost unchanged from the year-ago period.
Previous Quarter Highlights
Medtronic reported fourth quarter fiscal 2010 EPS of $0.89, beating the Zacks Consensus Estimate of $0.88 and the year-ago earnings of $0.82. In fiscal 2010, EPS was $3.22, compared to the Zacks Consensus Estimate of $3.21 and $2.92 in the year-ago period.
Revenues in the fourth quarter increased 10% year-over-year to $4.196 billion. However, excluding foreign currency translation, revenues increased 6%. This is the first time that the company has earned revenues in excess of $4 billion in a quarter.
Excluding Spinal, Medtronic witnessed sales growth across all business segments. Revenues from its biggest segment, Cardiac Rhythm Disease Management (CRDM) increased 8% year-over-year to $1.41 billion, driven by the strong demand for implantable cardioverter-defibrillators (ICDs). Spinal revenues were almost unchanged at $880 million. Growth was observed in international markets buoyed by higher demand for Medtronic’s balloon kyphoplasty in Western Europe.
Agreement of Analysts
Estimates for the first quarter have been on the negative side over the past month, which indicate some potential for downward pressure on the stock. Out of the 23 analysts covering the stock, 3 have lowered their earnings estimates without positive revisions. During the past week, estimate was lowered by 2 analysts.
Estimate revisions for fiscal 2011 reflect a similar negative bias. Over the last 30 days, 3 of the 25 analysts have lowered their forecasts with one positive revision.
The bearish sentiment for the upcoming quarter reflects economic concerns, which impact the company. Although Medtronic has been trying hard to revive its Spinal business, the market is growing at a slower pace. In addition to facing tough competition with the entry of many players, economic uncertainty is leading to lower demand for elective procedures.
The strong growth witnessed by the CRDM segment in the previous quarter is unlikely to be repeated. This is because Boston Scientific (BSX), one of Medtronic’s competitors had to halt shipments of ICD products in the US for a certain time period.
Medtronic benefited from this recall and captured roughly 2/3 of the lost revenue from the US ICD market, which amounted to $60 – $70 million in the quarter. However, with Boston Scientific pulling up its supply line, the benefit to Medtronic may not remain the same.
Moreover, the pending warning letter of the US Food and Drug Administration is yet to be resolved, which is delaying product launches in the CRDM segment.
Magnitude of Estimate Revisions
There have been no estimate revisions for the first quarter over the past 7 days. This implies analysts are expecting the company to report in line.
Recommendation
Medtronic’s long-term story remains intact, product approvals and launches will drive top line growth. Although the company is witnessing pricing pressure in the US market, it earns 41% of its revenues from international operations, especially the emerging markets, which hold strong potential. Besides, acquisitions should enable the company to record higher revenues in the forthcoming period.
Based on the long-term potential of the company, we maintain our Neutral rating on the stock, which also corresponds to the Zacks #3 Rank (short-term Hold recommendation).
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