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Medtronic (MDT) Down 1.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Medtronic (MDT). Shares have lost about 1.6% in that time frame, underperforming the S&P 500.

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

Medtronic  Q4 Earnings Miss Estimates, Revenues Top

Medtronic has reported fourth-quarter fiscal 2020 adjusted earnings per share of 58 cents, missing the Zacks Consensus Estimate by 1.7%. Adjusted earnings also plunged 62.3% year over year.

For full-year fiscal 2020, the company reported adjusted earnings per share of $4.59, which declined 12.1% from the prior-year period. The figure missed the Zacks Consensus Estimate by 2.3%.

Without certain one-time adjustments — including restructuring, amortization expenses and certain litigation charges — GAAP EPS was 48 cents, reflecting a 44.8% decline from the year-ago reported figure.

With respect to full fiscal 2020, GAAP EPS came in at $3.54, indicating a rise of 3.8% from fiscal 2019.

Total Revenues   

Worldwide revenues in the reported quarter grossed $5.99 billion, down 25% on an organic basis (excluding the impacts of currency and significant acquisitions, including Titan Spine) and down 26.4% on a reported basis. The top line beat he Zacks Consensus Estimate by a marginal 1.2%.

For full fiscal 2020, worldwide revenues amounted to $28.91 billion, declining 5.4% on a reported basis and 4.2% on an organic basis (considering adjustment for a $418-million negative impact of foreign currency). The figure beat the consensus mark by 0.3%.

In the quarter under review, U.S. sales (48% of total revenues) declined 33% year over year on a reported basis to $2.85 billion. While non-U.S. developed market revenues totaled $2.22 billion (37% of total revenues), depicting a 14% deterioration on a reported basis (down 11% at CER).

Again, emerging market revenues (15% of total revenues) amounted to $929 million, down 28% on a reported basis (down 24% at CER).

Segment Details

The company currently generates revenues from four major segments, namely Cardiac and Vascular Group (“CVG”), Minimally Invasive TherapiesGroup (“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 Surgical Innovations (“SI”), and Respiratory, Gastrointestinal & Renal (“RGR”) divisions. RTG consists of Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while Diabetes Group incorporates Intensive Insulin Management (“IIM”), Non-Intensive Diabetes Therapies (“NDT”) and Diabetes Service & Solutions (“DSS”) divisions.

In the fiscal fourth quarter, CVG revenues declined 33% at CER (down 34% on a reported basis) to $2.04 billion, representing the impact of the COVID-19 pandemic and particularly a decrease in deferrable procedure volumes and lower quarter-end customer bulk purchases.

CRHF sales totaled $940 million, down 38% year over year at CER (down 40% on a reported basis). The company witnessed a substantial decline in Arrhythmia Management.

CSH revenues were down28% at CER (down 30% as reported) to $697 million, attributable to noticeable decline in drug-eluting stents and transcatheter aortic valves (“TAVR”). 

APV revenues were down 26% at CER (down 27% on a reported basis) to $367 million. The company witnessed substantial decline in Aortic, Peripheral as well as Venous.

In MITG, worldwide sales totaled $1.93 billion, marking a 12% year-over-year decrease at CER (down14% on a reported basis), due to fall in procedure volumes resulting from the pandemic.

In RTG, worldwide revenues of $1.49 billion were down 33% year over year both on an organic and reported basis. The downside reflected the impact from the pandemic and particularly a decrease in deferrable procedure volumes and fall in quarter-end customer bulk purchases as well as capital equipment purchases.

Moreover, revenues at the Diabetes group decreased 7% at CER (down 9% a year-over-year basis) to $570 million.

Margins

Gross margin in the reported quarter contracted 690 basis points (bps) to 63% on an 8.8% fall in the cost of revenues to $2.26 billion. Adjusted operating margin contracted 1540 bps year over year to 16.1%. Meanwhile, selling, general and administrative expenses fell 9.9% to $2.36 billion, while research and development expenses declined 4.5% to $567 million.

Dividend Update

On May 20, 2020, the board of directors of the company approved a dividend hike for the first-quarter fiscal 2021, which resulted in the quarterly amount of 58 cents per share. This in turn led to an annual dividend of $2.32 per share, up from the previous $2.16 per share, thereby marking Medtronic’s 43rd consecutive year of dividend hike.

Guidance

On account of the uncertainty with respect to near-term financial results resulting from the COVID-19 pandemic, Medtronic has decided not to provide any formal annual or quarterly financial guidance at this moment.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -67.08% due to these changes.

VGM Scores

At this time, Medtronic has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. 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 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. It's no surprise Medtronic has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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