Medtronic Beats Earnings, Results Stronger

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Medtronic Inc. (MDT) reported fourth-quarter fiscal 2013 earnings per share (EPS) of 95 cents, up 1% year over year. After taking into account certain one-time items, adjusted EPS was $1.10, up 11% year over year and ahead of the Zacks Consensus Estimate of $1.03. Fiscal 2013 EPS came in at $3.37, a decline of 1% over the prior-year result. However, the full-year adjusted EPS was up 8% to $3.75, well ahead of the Zacks Consensus Estimate of $3.69.

Revenues in the reported quarter were $4.459 billion, up 4% year over year (up 5% at constant exchange rates or CER). It was also above the Zacks Consensus Estimate of $4.388 billion. The annualized revenues were pegged at $16.590 billion, up 4% on a reported basis and 5% at CER, marginally beating the Zacks Consensus Estimate of $16.521 billion.

Medtronic derived 47% of its total sales from the international market, which climbed 4% year over year (up 7% at CER) to reach $2.087 billion in the reported quarter. As a result of the company’s focus on emerging markets, revenues from these regions experienced continued growth momentum and increased 13% (14% at CER) to $521 million. This region now represents 12% of the company’s total revenue.

Segment Details

Medtronic earns revenues from two major groups – the Cardiac & Vascular Group and the Restorative Therapies Group. The former encompasses the Cardiac Rhythm Disease Management (“CRDM”), Coronary, Structural Heart, and Endovascular businesses; while the latter includes the Spine, Neuromodulation, Diabetes and Surgical Technologies businesses.

After a series of lackluster quarterly results, CRDM showed signs of improvement with 3% year-over-year sales growth (up 4% at CER) to $1.332 billion. Revenues from Implantable Cardioverter Defibrillators (:ICD) increased 2% at CER to $755 million, which according to the company outperformed the market. With the growing strength of the Advisa DR MRI (TM) SureScan (TM) pacing system in Japan, pacing system revenues increased 5% at CER to $505 million.

Coronary, Structural Heart and Endovascular recorded growth of 5%, 8% and 10%, respectively, at CER. The company is benefiting from the sale of the Resolute drug eluting stent (“DES”), which grew 22% at CER driven by significant share gains of the Resolute Integrity drug-eluting stent worldwide.

While strong CoreValve transcatheter aortic heart valve sales in the international markets led to growth in the Structural Heart business, Endovascular growth was based on solid performances of the Valiant Captivia thoracic stent graft across key geographies. The Endurant abdominal aortic stent continues to grow strong in Japan.

Spine revenues maintained its sluggish trend and fell 1% year over year (flat at CER) along with a decline in revenues from BMP (bone morphogenetic protein) and BKP (balloon kyphoplasty procedure). At CER, revenues from Core Spinal remained flat at $671 million. However, excluding revenues from BKP, Core Spinal grew in the low-single digit at CER.

Meanwhile, Surgical Technologies revenues were $407 million (up 10% year over year and up 11% at CER), while revenues at Neuromodulation were $492 million (up 6%, up 7% at CER) and at Diabetes were $407 million (up 4%, same at CER).

Margins

Gross margin during the reported quarter contracted 107 basis points (bps) to 74.6%. However, operating margin expanded 124 bps year over year to 32.6%, with a 1% increase in selling, general and administrative expenses (to $1.475 billion), a 4.1% rise in research and development expenses (to $409 million) and 125% decline in Other expenses (to $12 million).

Guidance

Medtronic provided its outlook for fiscal 2014. The company expects full-year EPS in the range of $3.80−$3.85 (annualized growth of 6%−8%) on revenue growth of 3%−4% at CER. The current Zacks Consensus Estimate for EPS stands at $3.83 (on revenues of $16.998 billion) and remains within the guided range.

Our Take

After several quarters of tepid growth, we are encouraged with the signs of improvement in Medtronic’s core CRDM and pacing segments. In this regard, we note that the challenging economic conditions, a competitive environment, pressure on core segments and larger-than-expected currency headwinds continue to remain major causes of concern for medical device majors like Boston Scientific (BSX) and St. Jude Medical (STJ). Both these companies barely managed to stay in line with the Zacks Consensus Estimate for earnings in the first quarter.

Currently, Medtronic retains a Zacks Rank #2 (Buy). Medical products companies such as Conceptus Inc. (CPTS) which carries a Zacks Rank #1 (Strong Buy), are expected to do well.
 

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