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Medical devices giant St. Jude Medical (STJ) is scheduled to report its third-quarter fiscal 2010 results before the market opens on Wednesday, October 20, 2010. In its second-quarter commentary, the company stated that it expects to post third-quarter earnings per share between 67 cents and 69 cents. Besides, based on the encouraging second-quarter results, it lifted earnings guidance for fiscal 2010 to $2.86-$2.91 from $2.80-$2.85.

With respect to earnings surprise, St. Jude made a clean sweep posting four positive earnings surprises in the preceding four quarters. Based on this impressive trend, we expect the company to outperform in the upcoming quarter. The current Zacks Consensus Estimate for the third-quarter is 68 cents, representing an estimated 14.93% annualized growth.

Second-Quarter Revisited
St. Jude reported strong second-quarter results with earnings per share of 79 cents outshining the Zacks Consensus Estimate of 73 cents, representing an 8.22% positive surprise. The better-than-expected results were fuelled by double-digit revenue growth across all business segments and a tax benefit associated with the federal research and development tax credit.

Revenues leapt 11% year-over-year, boosted by solid ICD revenues growth (up 18%) and favorable foreign currency exchange translation. CRM sales surged 12% led by higher demand for the company’s ICDs and pacemakers. ICD sales benefited from the suspension of ICD devices by rival
Boston Scientific (BSX) due to certain changes in the manufacturing process not approved by the federal regulators.

Cardiovascular, Atrial Fibrillation and Neuromodulation revenues grew 5%, 13% and 17%, respectively. St. Jude’s cost-management initiatives helped increase operating margins in the quarter.

Estimate Revisions Trend

Agreement
Estimates for the forthcoming quarter have barely moved over the past week with just 1 out of 26 analysts having lowered his/her forecast while none raising their estimates. Estimates have been mixed over the past month with 1 positive and 1 negative revision, thereby lacking any directional agreement.

Estimates for fiscal 2010 are evenly balanced over the last 7 days with 1 analyst (out of 26) having truncated his/her forecast accompanied by a solitary reverse movement. However, the estimates over the past month reflect a bullish sentiment with 3 analysts lifting their forecasts with 1 moving in the opposite direction.

The positive analyst sentiment reflects the encouraging growth prospects in the company’s core ICD business, supported by new product launches, realignment of sales organization and solid inventory position. Conversely, a still challenging macro backdrop, pricing/volume pressure in the U.S. and concerns over a sluggish CRM market have prompted some analysts to tread with caution.

Magnitude
Given the lack of estimate revisions, the magnitude of revisions for third-quarter has been static over the last 7 and 30 days. A similar pattern applies to the estimates for fiscal 2010. The current Zacks Consensus Estimate for fiscal 2010 is $2.90, reflecting an estimated year-over-year growth of 19.36%.

Our Take
St. Jude has been producing consistent revenue and earnings growth over the past few quarters. Moving forward, revenue growth should be further fuelled by numerous product introductions and technological advancements. Launch of several ICD products in the U.S. and Europe should boost the company’s CRM market share in fiscal 2010.

Neuromodulation represents another increasingly promising prospect (driven by new product introductions) for St. Jude which offers its spinal cord stimulators (NYSE:SCS) in this nascent but fast-growing market. Moving forward, growth in Neuromodulation will be fostered by the adoption of the company’s deep brain stimulation (NYSEARCA:DBS) systems in Europe and sustained uptake of the Eon Mini SCS system.

Moreover, the acquisition of Massachusetts-based medical technology firm LightLab Imaging in July 2010 has enhanced opportunities for the company’s Cardiovascular business. Also, the recent launch of a new manufacturing plant in Costa Rica is expected to boost production of St. Jude’s heart valve products and augment the manufacturing capacity of its Cardiovascular division.

In Atrial Fibrillation (NYSE:AF), St. Jude’s EnSite mapping system for diagnosis and treatment of arrhythmia continues to be the key driving force. The company has reportedly struck a deal to acquire heart devices maker
AGA Medical Holdings (AGAM) for $1.3 billion. The transaction, which is expected to close by end-2010, is expected to considerably strengthen St. Jude’s AF and Cardiovascular franchises. The company will provide more update on this deal in its third-quarter earnings call.

While St. Jude is poised to grow its market share in the CRM segment (especially in ICDs), it is challenged by competition-driven pricing pressure and heightened competition in a mature pacemaker market. The Government-mandated healthcare reform in the U.S. has created a degree of uncertainty for medical devices companies and led to a less flexible pricing environment.

Moreover, St. Jude is exposed to foreign-exchange headwinds which may constrict earnings for the remainder of fiscal 2010. Our long-term Neutral recommendation on the stock is supported by a Zacks #3 Rank (Hold).

Source: St. Jude Medical: Earnings Preview