St. Jude Remains Neutral
We reiterate our Neutral recommendation on St. Jude Medical (STJ). St. Jude reported third quarter 2012 adjusted earnings per share of 83 cents (up 6.4% year-over-year). The results also beat the Zacks Consensus Estimate by 2 cents. However, profits dropped 22.5% to $176 million (or 56 cents a share) on account of weak revenue generation and a contraction in operating margin.
Reported net revenues of $1,326 million were down 4% year over year and also missed the Zacks Consensus Estimate of $1,342 million. Net sales grew less than 1% on constant currency basis. All segments reported disappointing results, especially Cardiac Rhythm Management (CRM) and Cardiovascular units, except the Atrial Fibrillation (AF) business.
With a market-cap of $11.70 billion, St. Jude is a leading provider of medical devices with a number of growth drivers, which are expected to boost sales over the long term. The company is well positioned to savor incremental opportunities on the back of a strong product pipeline.
The AF market has become one of the best growth opportunities in the MedTech space. With a market size of roughly $2.4 billion, St. Jude is growing at a double-digit rate in this market, driven by higher sales of ablation catheters, capital equipment and disposable products. Moreover, the company identified seven major growth drivers in the CV business alone, which are anticipated to boost sales to over $2 billion annually after their maturity.
St. Jude’s 2012 business realignment plan is focused on improving the company’s operating margin in the face of a tough macroeconomic environment. The company plans to utilize this savings to fund its portfolio of new growth drivers and maintain its industry leading position. This measure was necessary to hedge against the upcoming MedTech tax from 2013 and generate double-digit bottom-line growth.
While a host of new growth drivers (including new products, cost saving measures and share buyback programs) are expected to boost results in 2013 and beyond, we remain cautious about increased competition, a weakening Euro, the soft CRM business and the overall tough macroeconomic conditions.
The company’s downward revision of its core CRM sales is a significant cause of concern. The prevailing macroeconomic factors, realignment expenses, pricing pressure, austerity measures and the impact of the health care reforms are weighing down on the CRM market moving ahead. Further, the implantable cardioverter defibrillator systems (:ICD) business continues to be plagued by reliability issues concerning the high-voltage lead product lines.
A choppy CRM space continues to overhang on St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX).
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