(MDT) Medtronic 2012 Second Quarter Earnings Scorecard

The announcement of Medtronic’s (MDT) second quarter fiscal 2012 results, as on November 22, 2011, has led analysts to revise their estimates lower for the third quarter although the situation improves for the current fiscal.

Second Quarter Highlights

Medtronic reported an adjusted EPS of 84 cents in the second quarter of fiscal 2012, a couple of cents above the Zacks Consensus Estimate and the year-ago quarter.

Revenues were $4.132 billion in the quarter, up 6% (up 3% at constant exchange rates or CER) year over year and higher than the Zacks Consensus Estimate of $4.066 billion. The company recorded 44% of its total sales from the international market during the quarter, which climbed 14% year over year (6% at CER) to reach $1.832 billion. As a result of the company’s focus on emerging markets, revenues from these regions increased 21% (19% at CER) to $414 million.

Medtronic’s seven segments – Cardiac Rhythm Disease Management (CRDM), Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control generated corresponding sales of $1.268 billion (up 2% year over year but down 2% at CER), $839 million (down 1% or down 3% at CER), $830 million (up 12% or 8% at CER), $421 million (up 9% or 6% at CER), $367 million (up 13% or 10% at CER), $298 million (up 22% or 20% at CER) and $109 million (flat or down 3% at CER).

Agreement of Analysts

Over the last 7 days, 7 of the 18 analysts covering the stock have lowered their estimates for the third quarter of the current fiscal with 2 revisions in the opposite direction. However, the situation improves for fiscal 2012 with 4 analysts raising their estimates compared with only 1 downward revision, over the past 7 days.

As Medtronic continues to struggle with its core segments – defibrillators and spinal implants – analysts are cautious over the near term. In ICDs, the performance continues to be hampered by DOJ’s investigations and the JAMA article published in January 2011. Medtronic’s competitors, Boston Scientific (BSX) and St Jude Medical (STJ), also face a similar situation and are trying to increase their respective market share amidst declining ICD market growth.

Despite pertinent challenges, Medtronic is undertaking initiatives to revive its top line. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which should benefit the company over the long term.

Magnitude of Estimate Revisions

The magnitude of estimate revisions has been insignificant for the third quarter, in the past 7 days. Overall, the consensus estimate for the upcoming quarter has gone down by a penny to 85 cents while the fourth-quarter estimate for fiscal 2012 remained unchanged at 97 cents. Estimate for fiscal 2012 increased by a penny to $3.45 in the last 7 days.

Our Take

Medtronic has decided to focus on globalization due to the opportunity rife in international destinations, especially in the emerging markets. Among the different regions the company caters to, the highest growth was recorded by Greater China (24% and annualized at over $600 million) followed by Latin America (17%), Middle East and Africa (12%), other Asia (6%) and Japan (2%) while Canada declined 1%. Growth from Europe and Central Asia grew 5% and included deferred revenue of $14 million in Greece due to the current economic environment and payment uncertainty. Emerging markets continue to be the key focus area of the company. These markets recorded 20% growth during the quarter, a trend that is expected to continue into 2012. This quarter marked the 11th straight quarter of generating more than 20% growth in China.

Medtronic has witnessed greater contribution from recently launched products along with strong growth from international markets. Moreover, it is encouraging to note that the company recorded double-digit growth in several businesses including transcatheter valves, AF Solutions, Endovascular, Uro/Gastro and continuous glucose monitoring (CGM).

Having witnessed strong contribution from products that came from acquisitions, the company will be in the look out for suitable tuck-in that are immediately accretive. Simultaneously, we are impressed with the recent decision to divest Physio-Control to better focus on areas with potential.

However, macroeconomic conditions in many of the developed countries have led to reduction in healthcare budgets and increased pressure on utilization. This leads to fewer procedures, a trend that is expected to continue in 2012 and affect revenue growth.

We currently have a Neutral recommendation on Medtronic, which corresponds to a Zacks #3 Rank (Hold) in the short term. Both St Jude Medical and Boston Scientific carry Neutral recommendations.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/

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