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Why Is Medtronic (MDT) Down 1.2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Medtronic (MDT). Shares have lost about 1.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Solid Overall Growth Drives Medtronic's Q3 Earnings

Medtronic reported third-quarter fiscal 2019 adjusted earnings per share (EPS) of $1.29, beating the Zacks Consensus Estimate by 4%. Adjusted earnings rose 10.3% year over year.

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization and impairment of in-process research and development (IPR&D) assets among others. After adjusting for foreign exchange tailwind of 2 cent, adjusted EPS increased 8.5% year over year.

Without the adjustments, net earnings were 94 cents per share, compared with loss of $1.03 in the year-ago quarter.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.55 billion, up 4.4% on an organic basis (up 2.4% on a reported basis). The top line missed the Zacks Consensus Estimate by 0.13%. Organic revenues in the quarter include adjustments for a $149-million negative impact from foreign currency.

In the quarter under review, U.S. sales (53% of total revenues) increased 2.3% year over year on a reported basis to $4 billion. Non-U.S. developed market revenues totaled $2.37 billion (31% of total revenues), reflecting a 0.6% increase reportedly (up 3.6% on a constant currency basis). Emerging market revenues (16% of total revenues) amounted to $1.18 billion, up 6.8% reportedly (up 13.9% 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 1.6% at constant exchange rate or CER (down 0.5% as reported) to $2.79 billion, driven by mid-single digit growth in CSH and APV offset by low-single digit drop in CRHF, all at CER.

CRHF sales totaled $1.39 billion, down 2.3% year over year at CER (down 4.1% as reported). The mid-single digits growth in Arrhythmia Managementwas offset by mid-teens declines in Heart Failure, including mid-forties declines in sales of left ventricular assist devices.

CSH revenues were up 5.9% at CER (up 3% as reported) to $913 million driven by mid-teens constant currency growth in transcatheter aortic valves as a result of strong global uptake of the CoreValve Evolut PRO platform. The company reported flat year-over-year coronary sales in the reported quarter as the mid-teens growth in guide catheters and low-double digit growth in coronary balloons were offset by mid-single digit declines in drug-eluting stents.

APV revenues registered 6.1% growth at CER (up 4.2% as reported) to $476 million, driven by mid-teens growth in Venous, mid-teens growth of in drug-coated balloon (DCB) and high-single digit growth in thoracic stent graft systems, all at comparable CER basis.

In MITG, worldwide sales totaled $2.12 billion, marking a 6.6% year-over-year increase at CER (up 4.1% on a reported basis) on high-single-digit growth in RGRand mid-single digit growth in SI.

In RTG, worldwide revenues of $2.03 billion were up 5.5% year over year at CER (up 4.2% as reported) on low-double-digit growth in Brain Therapies, mid-single-digit growth in pain therapies, low-single-digit growth in Specialty Therapies and flat performance in the Spine business.

Moreover, revenues at the Diabetes group increased 6.5% at CER (up 4.5% as reported) to $610 million.

Margins

Gross margin in the reported quarter contracted 24 basis points (bps) to 69.9% on a 3.2% rise in cost of revenues to $2.27 billion. Adjusted operating margin improved 73 bps year over year to 27.4% despite a 0.4% rise in research and development expenses (to $561 million) and a 2.9% uptick in selling, general and administrative expenses (to $2.59 billion). Other expenses in the reported quarter totaled $57 million as compared with $128 million a year ago.

Guidance Revised

The company has updated its fiscal 2019 revenue guidance.

For the full year, organic revenue growth expectations have been narrowed to the range of 5.25-5.5% from the previous range of 5.0-5.5%. Currency fluctuation is now expected to negatively impact the top line by $425-$475 million (previous guidance range was $420-$520 million). The current Zacks Consensus Estimate for revenues is pegged at $30.53 billion.

Fiscal 2019 adjusted EPS view is raised at the range of $5.14-$5.16 from the earlier-announced range of $5.10-$5.15. Currency fluctuation is expected to havea modestly positive impact on the full-year adjusted EPS. The Zacks Consensus Estimate of $5.12 falls below the guided range.

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 an A. 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. 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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