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St. Jude's Q3 Earnings Beat, Guides Up

Zacks Equity Research

St. Jude Medical Inc.’s (STJ) third-quarter adjusted earnings per share of 90 cents beat the Zacks Consensus Estimate by a penny. It also surpassed the year-ago earnings of 83 cents by 8.4%. Adjusted earnings were at the higher end of the company’s third-quarter guidance of 88–90 cents a share.

Net income (including one-time items) for the quarter surged 48.9% to $262 million or 90 cents a share from $176 million or 56 cents per share in the year-ago quarter.

Revenues inched up 1% (3% in constant currency) year over year to $1,338 million in the third quarter and exceeded the Zacks Consensus Estimate of $1,321 million. Unfavorable foreign currency lowered total revenues by $26 million. Revenues in the U.S. (48.3% of total revenues) and in the international markets increased 1.1% and 0.7% to $646 million and $692 million, respectively in the reported quarter.

Gross margin declined by a whopping 200 basis points (bps) to 71.2% in the quarter from 73.2% in the prior-year quarter. Selling, general and administrative expenses decreased 0.9% to $452 million. Research and development expenses grew 1.2% to $172 million in the quarter. However, operating margin rose 570 bps to 23.4% from 17.7% a year ago, mainly on account of lower special charges.

Segment Review

Revenues from the Cardiac Rhythm Management (CRM) division – St. Jude’s mainstay – slid 1% (flat in constant currency) to $682 million. This represents a marked improvement from the 4% decline reported in the second quarter of 2013. ICD revenues improved 1% (up 2% constant currency) to $418 million, while pacemaker sales dropped 5% (down 3% in constant currency) to $264 million.

The Atrial Fibrillation division is the only business that is giving higher returns compared to the other segments. Revenues from this division climbed 7% (up 10% in constant currency) year over year to $235 million.

Revenues from the Cardiovascular franchise inched up 1% (4% in constant currency) to $317 million. Within Cardiovascular, vascular product revenues dipped 1% to $168 million while structural heart product revenues grew 3% to $149 million.

Neuromodulation revenues were up roughly 3% both in reported and constant currency bases to $104 million in the quarter.

Financial Condition

St. Jude exited the third quarter of 2013 with cash and cash equivalents of $1,245 million, 4.3% higher than $1,194 million as of Dec 29, 2012. Long-term debt increased 33.5% to $3,403 million from $2,550, as of Dec 29, 2012.

Guidance Raised

STJ has provided its forecast for the fourth quarter and has also revised its earnings guidance for 2013. The company expects total revenues for full year 2013 to be in the range of $5,394 million to $5,474 million.

Further, the company raised its adjusted earnings expectations for the year to the band of $3.72–$3.74 from the earlier range of $3.70–$3.73. The current Zacks Consensus Estimate for 2013 revenues and earnings are pegged at $5,450 million and $3.72 per share.

For the fourth quarter, St. Jude anticipates revenues to be in the range of $1,315 million to $1,395 million and adjusted earnings between 95 and 97 cents a share. The Zacks Consensus Estimate for revenues and earnings for the fourth quarter stands at $1,388 million and $96 cents per share, respectively.

Our Take

We are impressed with STJ’s third quarter results, which beat estimates at both fronts. Moreover, the company’s raised guidance is encouraging. New products from fresh acquisitions should further propel the top line in the near term. We have also noted sequential gradual improvement in the beleaguered core CRM business.

St. Jude currently carries a Zacks Rank #2 (Buy). Other medical products companies such as Resmed Inc. (RMD), Bio-Rad Laboratories, Inc. (BIO) and Boston Scientific Corp. (BSX) are also expected to do well. While RMD and BIO carry a Zacks Rank #1 (Strong Buy), BSX has a Zacks Rank #2 (Buy).

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