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Medtronic (MDT) Up 0.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
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It has been about a month since the last earnings report for Medtronic (MDT). Shares have added about 0.9% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Medtronic due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Medtronic reported first-quarter fiscal 2019 adjusted earnings per share (EPS) of $1.17, beating the Zacks Consensus Estimate of $1.11. Adjusted earnings rose 4.5% year over year.

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization, litigation-related charges, gain on minority investment and business-exit related charges and acquisition-related items. After adjusting for foreign exchange tailwind of 5 cents, adjusted EPS was $1.12.

Without the adjustments, net earnings were 79 cents per share, compared with 74 cents in the previous year.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.38 billion, up 6.8% on an organic basis (down 0.1% on a reported basis). The top line surpassed the Zacks Consensus Estimate by 2.2%. Organic revenues in the quarter include adjustments for divestitures of Patient Care, Deep Vein Thrombosis (Compression) and Nutritional Insufficiency businesses to Cardinal Health and a $78-million positive impact from foreign currency.

In the quarter under review, U.S. sales (52% of total revenues) fell 4.4% year over year on a reported basis (up 6.4% after adjusting for the divestitures) to $3.86 billion. Non-U.S. developed market revenues totaled $2.41 billion (33% of total revenues), reflecting a 4% increase reportedly (up 5.5% on a constant currency basis).
 
Emerging market revenues (15% of total revenues) amounted to $1.11 billion, up 7.6% reportedly (up 11.2% on a constant currency basis).

Segment Details

The company currently generates revenues from four major groups, viz. Cardiac and Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), Restorative Therapies Group (RTG) and Diabetes Group.

CVG comprises Cardiac Rhythm & Heart Failure (CRHF), Coronary & Structural Heart (CSH) and Aortic & Peripheral Vascular divisions (APV). MITG includes the Surgical Innovations (SI) and the Respiratory, Gastrointestinal & Renal (RGR) divisions. RTG comprises the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Service & Solutions (DSS) divisions.

CVG revenues improved 5% at constant exchange rate or CER (up 6.2% as reported) to $2.81 billion, driven by strong, low-double digit growth in CSH, mid-single-digit growth in APV, and low-single-digit growth in CRHF, all at CER.

CRHF sales totaled $1.43 billion, up 1.4% year over year at CER (up 2.6% as reported). This came on the back of low-single-digit growth in Arrhythmia Management at CER. This apart, high-teens growth at CER in AF Solutions, high-30s CER growth in TYRX in Infection Control also contributed to the growth. Further, mid-single-digit growth in Pacing driven by solid uptake of the Micra Transcatheter Pacing System and the Azure wireless pacemaker drove the top line.

CSH revenues were up 10.9% at CER (up 12.2% as reported) to $917 million on the back of high-teens constant currency growth in transcatheter aortic valves as a result of strong global uptake of the CoreValve Evolut PRO platform. Moreover, double-digit CER growth in drug-eluting stents and guide catheters drove high-single-digit CER growth in the Coronary business.

APV revenues registered 5.2% growth at CER (up 6.6% as reported) to $468 million, driven by low-single-digit growth in Aortic, mid-single-digit growth in Peripheral and mid-teens growth in endoVenous, all at comparable CER basis.
In MITG, worldwide sales totaled $2.05 billion, marking a 4.9% year-over-year increase at CER (down 17.5% on a reported basis) on mid-single-digit growth in SI and low-single-digit growth in RGR, both at comparable CER basis.

In RTG, worldwide revenues of $1.95 billion were up 6.8% year over year at CER (up 7.7% as reported) on mid-teens growth in Brain Therapies and Pain Therapies, low-single-digit growth in Specialty Therapies and flat performance in the Spine business.

Moreover, revenues at the Diabetes group increased 26.3% at CER (27.4% as reported) to $572 million.

Margins

Gross margin in the reported quarter expanded 200 basis points (bps) to 70.2% on a 2.8% rise in gross profit to $5.18 billion. Adjusted operating margin contracted 10 bps year over year to 24.9% owing to a 6.6% rise in research and development expenses (to $585 million) along with a 0.8% uptick in selling, general and administrative expenses (to $2.60 billion). Other expenses in the reported quarter totaled $151 million as compared with $65 million a year ago.

Guidance Revised

The company has updated its fiscal 2019 earnings and revenue guidance.

For the full year, organic revenue growth expectations have been raised to the range of 4.5-5.0% from the previous range of 4-4.5%. Currency fluctuation is now expected to negatively impact the top line by $420-$520 million compared with the previous estimation of $50-$150 million. The current Zacks Consensus Estimate for revenues is pegged at $30.57 billion.

Fiscal 2019 adjusted EPS view is reiterated at the range of $5.10 to $5.15. This assumes a neutral effect from foreign exchange compared to a benefit of 5 cents stated previously. The Zacks Consensus Estimate of $5.11 is near the high end of the guided range. Moreover, the company has raised its implied constant currency adjusted EPS growth expectations to the range of 9-10% from the previous range of 8-9%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Medtronic has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Medtronic has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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