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Medtronic (MDT) Down 1.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
Is (BXMT) Outperforming Other Finance Stocks This Year?

A month has gone by since the last earnings report for Medtronic (MDT). Shares have lost about 1.8% in that time frame, outperforming 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 drivers.

Solid Overall Growth Drives Medtronic's Q2 Earnings

Medtronic reported second-quarter fiscal 2019 adjusted earnings per share (EPS) of $1.22, beating the Zacks Consensus Estimate by 7%. Adjusted earnings rose 14% year over year.

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization and unrealized and realized losses on minority investments. After adjusting for foreign exchange tailwind of 1 cent, adjusted EPS increased 13% year over year.

Without the adjustments, net earnings were 82 cents per share, compared with $1.48 in the year-ago quarter.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.48 billion, up 7.5% on an organic basis (up 6.1% on a reported basis). The top line surpassed the Zacks Consensus Estimate by 1.8%. Organic revenues in the quarter include adjustments for a $95-million negative impact from foreign currency.

In the quarter under review, U.S. sales (54% of total revenues) increased 8.3% year over year on a reported basis to $4.05 billion. Non-U.S. developed market revenues totaled $2.28 billion (31% of total revenues), reflecting a 1.8% increase reportedly (up 3.1% on a constant currency basis). Emerging market revenues (15% of total revenues) amounted to $1.15 billion, up 7.3% reportedly (up 13.5% 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 4.4% at constant exchange rate or CER (up 3.1% as reported) to $2.86 billion, driven by high-single digit growth in CSH and APV and low-single digit growth in CRHF, all at CER.

CRHF sales totaled $1.47 billion, up 1.4% year over year at CER (up 0.3% as reported). This came on the back of mid-single-digit growth in Arrhythmia Management. According to Medtronic, high-single-digit growth in Pacing driven by solid uptake of the Micra Transcatheter Pacing System and the Azure wireless pacemaker drove the top line at Arrhythmia Management. This apart, high-twenties growth of the TYRX Absorbable Antibacterial Envelope and mid-teens growth in AF Solutions also contributed to the growth.

CSH revenues were up 7.8% at CER (up 6.1% as reported) to $906 million on the back of mid-teens constant currency growth in transcatheter aortic valves as a result of strong global uptake of the CoreValve Evolut PRO platform. Moreover, mid-single-digit CER growth in drug-eluting stents, low-double digit growth in coronary balloons and high-teens growth in guide catheters drove mid-single-digit CER growth in the Coronary business.

APV revenues registered 7.3% growth at CER (up 6.2% as reported) to $480 million, driven by high-teens growth in endoVenous, low-double digit growth of the IN.PACT Admiral drug-coated balloon (DCB) and mid-single digit growth in abdominal aortic aneurysm (AAA) stent graft systems, all at comparable CER basis.

In MITG, worldwide sales totaled $2.05 billion, marking a 6.8% year-over-year increase at CER (up 4.9% on a reported basis) on high-single-digit growth in both SI and RGR.

In RTG, worldwide revenues of $1.99 billion were up 7.8% year over year at CER (up 7% as reported) on high-teens growth in Pain Therapies, low-double-digit growth in Specialty Therapies, high-single digit growth in Brain Therapies and flat performance in the Spine business.
Moreover, revenues at the Diabetes group increased 27.5% at CER (up 26.2% as reported) to $583 million.

Margins

Gross margin in the reported quarter expanded 67 basis points (bps) to 70.6% on a 7.1% rise in gross profit to $5.28 billion. Adjusted operating margin improved 329 bps year over year to 26.9% despite a 6.1% rise in research and development expenses (to $590 million) and a 2.6% uptick in selling, general and administrative expenses (to $2.61 billion). Other expenses in the reported quarter totaled $70 million as compared with $167 million a year ago.

Guidance Revised

The company has raised its fiscal 2019 revenue guidance.

For the full year, organic revenue growth expectations have been raised to the range of 5.0-5.5% from the previous range of 4.5-5.0%. Currency fluctuation is now expected to negatively impact the top line by $420-$520 million (unchanged from the previous guidance). The current Zacks Consensus Estimate for revenues is pegged at $30.44 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 (unchanged). The Zacks Consensus Estimate of $5.12 is near the high end of the guided range. Moreover, the company has reaffirmed its constant currency adjusted EPS growth expectations at the range of 9-10%.

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 a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, 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 D. 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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