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Medtronic Earnings Push Medical Device ETF Higher

Eric Dutram

Health care stocks have been doing quite well over the past few months, leading the stock recovery higher. In fact, the broad based SPDR Select Sector Health Care ETF (XLV) has outpaced the market by a pretty wide margin so far in 2013, outgaining the key benchmark by about 1,000 basis points in this relatively short time frame.

However, despite this solid run in terms of performance numbers, one corner of the health care world has struggled so far in 2013, the medical device sector. This segment, as represented by the Medical Device ETF (IHI), has had a solid start to 2013, but is far below its peers in the health care space (see Healthcare ETF in Focus on Earnings Reports).

Part of the reason for this relative underperformance may be due to worries over this space’s treatment under Obamacare, and concerns over sluggish earnings results. Fortunately, Medtronic (MDT) may have broken this trend with its latest earnings report.

Medtronic Earnings in Focus

Medtronic analysts were looking for earnings of $1.03/share for the current quarter, representing a low (4.3%) growth rate in terms of earnings. The company beat this mark though, posting results of $1.10/share, a beat of 6.8% on the bottom line (also see Could the Small Cap HealthCare ETF Be a Great Pick?).

The firm was boosted by improving sales of pacemakers and implantable defibrillators which rose by 3%, while neuromodulation devices jumped higher by 6% for the time frame. Spinal treatment sales were more or less flat—falling by 1%-- but investors and analysts keyed in on the overall positive trend for the company as it looks to rebound from troubles last year.

Guidance of revenue between $17 billion and $17.2 billion were also to investors’ liking, helping to boost demand for MDT shares in Tuesday trading. The company surged by nearly 5% on the day, along with another percent or so after the bell, suggesting that the firm is in a bullish trend after the solid earnings report.

Why This Matters for IHI

Medtronic is considered a bellwether for the medical device industry as the largest pure play company in the space. As a result, its earnings tend to set the tone for the sector and help drive expectations for smaller companies in the space (read Medical Device ETFs: A Better Way to Play Health Care?).

This is especially true in the case of IHI, as Medtronic is the top holding in the fund, accounting for nearly 11% of assets. And considering that the product only has 40 stocks in its basket anyway, the importance of MDT to the medical device ETF cannot be overstated.

Thanks to MDT’s positive report, shares of IHI rose by about 1% on the day, not a huge amount, but far above the S&P 500’s 14 basis point gain in the session. The boost —while a bit less than XLV on the day—continued the strong trend of IHI over the past month or so.

The fund had been lagging both XLV and SPY in the trailing one month, but it has turned it around in the past month or so. In this time frame, IHI has outperformed both SPY and XLV, meaning that somewhat of a reversal might be at hand in this corner of the market.

Bottom Line

MDT recently was upgraded to a Zacks Rank of 3 (Hold) from a sell rating, just in time for the solid earnings report. And given the profit results for MDT and decent guidance from management, investors could see some positive trends in terms of estimate revisions for MDT and other companies across the space (see Defensive Sector ETFs Leading the Market).

For now, we are keeping our Zacks ETF Rank of 3 (Hold) on this fund, but there are some bullish trends certainly building in this market. For this reason, investors might want to think about taking a closer look at this specialized play in the health care market as positive news is finally coming back to the space suggesting that more outperformance might be in the future for the medical device ETF.

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