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Will Medtronic (MDT) Miss Earnings Estimates?

Zacks Equity Research

Medical device major Medtronic Inc. (MDT) is scheduled to report its second-quarter fiscal 2014 earnings on Nov 18, 2013. Last quarter, the company’s earnings remained in line with our expectations. Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Medtronic was off to a disappointing start for fiscal 2014 with the top line missing estimates in the last reported quarter. Although adjusted EPS managed to remain in line with the Zacks Consensus Estimate, margin pressure remained a major downside.

We are also concerned about the recent U.S. Food and Drug Administration’s (:FDA) warning on certain Medtronic devices. As per the announcement, the company’s recently initiated voluntary field action related to certain guidewires were classified as a Class I recall by FDA.Class I recall implies a situation where there is a reasonable probability of serious health hazards or death occurring from the use of a violative product.

These recalled guidewires were designed to facilitate percutaneous coronary interventions or the placement of left ventricular leads for cardiac rhythm devices. According to Medtronic, these include certain lots made since April.

Accordingly, Medtronic has already taken the necessary steps to prevent future shipments of these recalled products. Although the company is taking all necessary efforts to wheel itself out of this difficult situation, a huge setback is anticipated in the company’s performance down the road.

In the first quarter, Medtronic witnessed strong CoreValve transcatheter aortic heart valve sales in the international market. This led the upside in its Structural Heart business. Furthermore, sales of CoreValve in Germany were encouraging.

However, in Jul 2013, the German District Court of Mannheim declared that Medtronic’s CoreValve and CoreValve Evolut systems infringe Edwards Lifesciences Corp.’s (EW) Spenser patent for transcatheter heart valve technology. This ruling forced Medtronic to recall and discontinue the sale of the products in Germany. During the first-quarter earnings call, management at Medtronic asserted that the injunction against CoreValve in Germany is a major obstacle and will hurt sales in the region.

Earnings Whispers?

Our proven model does not conclusively show that Medtronic is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Breakeven Zacks ESP: That is because the Most Accurate estimate stands at 90 cents while the Zacks Consensus Estimate is also pegged at the same point. Hence the difference is 0.00%.

Zacks Rank #2 (Buy): Medtronic’s Zacks Rank #2 when combined with a BreakevenESP makes surprise prediction difficult. We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

However, here are some worthy companies in the medical product industry that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Mazor Robotics Ltd. (MZOR), earnings ESP of +44.44% and a Zacks Rank #3 (Hold).

Cyberonics Inc. (CYBX), earnings ESP of +2.04% and a Zacks Rank #3 (Hold).

Read the Full Research Report on MDT
Read the Full Research Report on MZOR
Read the Full Research Report on EW
Read the Full Research Report on CYBX

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