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Medtronic (MDT) Up 8.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Medtronic (MDT). Shares have added about 8.5% in that time frame, outperforming 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.

Solid Overall Growth Drives Medtronic's Q4 Earnings

Medtronic reported fourth-quarter fiscal 2019 adjusted earnings per share (EPS) of $1.54, beating the Zacks Consensus Estimate by 5.5%. Adjusted earnings also rose 8.5% year over year.

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization and impairment of in-process research and development (IPR&D) assets among others. After adjusting the foreign exchange headwind of 1 cent, adjusted EPS increased 9% year over year.

Without the adjustments, net earnings were 87 cents per share, reflecting an 18.7% decline from the year-ago quarter.

For the full year, adjusted EPS came in at $5.22, representing a 9.4% rise from the year-earlier period. The number also exceeded the Zacks Consensus Estimate by 1.4%.

Total Revenues

Worldwide revenues in the reported quarter grossed $8.15 billion, up 3.6% on an organic basis (flat on a reported basis). The top line exceeded the Zacks Consensus Estimate by 0.46%. Organic revenues in the quarter include adjustments for a $289-million negative impact from foreign currency.

Fiscal 2019 worldwide revenues were $30.56 billion, up 5.5% on an organic basis (up 2% on a reported basis). Organic revenues in the year include adjustments for a $455-million negative effect from foreign currency. The annual figure also exceeded the Zacks Consensus Estimate of $30.52 billion.

In the quarter under review, U.S. sales (52% of total revenues) inched up 2.3% year over year on a reported basis to $4.28 billion. Non-U.S. developed market revenues totaled $2.57 billion (32% of total revenues), depicting a 5.3% decrease reportedly (up 1.7% at constant exchange rate or CER). Emerging market revenues (16% of total revenues) amounted to $1.29 billion, up 3.9% reportedly (up 12% at CER).

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.

In the fourth quarter, CVG revenues improved 1.1% at CER (down 2.7% as reported) to $3.05 billion, driven by mid-single digit growth in APV and CSH, offset by a low-single digit decline in CRHF, all at CER.

CRHF sales totaled $1.55 billion, down 1.4% year over year at CER (down 4.8% as reported). The mid-single digits’ growth in Arrhythmia Management was offset by low-double digit fall in Heart Failure including high-thirties’ decline in sales of left ventricular assist devices.

CSH revenues were up 3.6% at CER (down 1.1% as reported) to $994 million, driven by low-double digit growth in transcatheter aortic valves. The company reported low-single digits’ year-over-year deterioration in coronary sales in the quarter.

APV revenues registered 4.4% growth at CER (up 1% as reported) to $502 million, boosted by high-single digits growth in Venous, mid-single digits’ rise in Aortic and low-single digits’ improvement in Peripheral, all on comparable CER basis.

In MITG, worldwide sales totaled $2.26 billion, marking a 5.1% year-over-year increase at CER (up 0.8% on a reported basis) in mid-single digit growth in both SI (Surgical Innovations) and RGR (Respiratory, Gastrointestinal & Renal).

In RTG, worldwide revenues of $2.22 billion were up 6.5% year over year at CER (up 4.1% as reported) on low-double digit growth in Brain Therapies, high-single digit growth in Specialty Therapies, mid-single digit growth in Pain Therapies and low-single digit growth in the Spine business.

Moreover, revenues at the Diabetes group were nudged up 0.6% at CER (down 2.9% as reported) to $626 million. In the quarter under consideration, Medtronic suffered year-over-year difficult comparisons in pump sales.

Margins

Gross margin in the reported quarter contracted 104 basis points (bps) to 69.5% on a 3.2% rise in cost of revenues to $2.48 billion. Adjusted operating margin improved 105 bps year over year to 30.3% despite a 0.3% increase in research and development expenses (to $594 million) and a 0.9% uptick in selling, general and administrative expenses (to $2.62 billion). Other income in the quarter under discussion totaled $20 million as compared to the $175-million expense a year ago.

Fiscal 2020 Guidance

The company has initiated its fiscal 2020 revenue and EPS outlook.

For the full year, organic revenue growth is expected to be 4%. Currency fluctuation is projected to affect the top line by 1-1.5%. The current Zacks Consensus Estimate for revenues is pegged at $31.63 billion.

Fiscal 2020 adjusted EPS view is estimated in the range of $5.44-$5.50. Currency fluctuation is expected to have a 10-cent adverse impact on the full-year adjusted EPS. The Zacks Consensus Estimate of $5.44 for the metric falls at the lower end of the guided range.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Medtronic has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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