Subsequent to the announcement of Medtronic’s (MDT) second quarter fiscal 2011 results on November 23, 2010, majority of the analysts have lowered their estimates for the forthcoming period.
Second Quarter Highlights
Medtronic reported an adjusted EPS of $0.82 during the second quarter of fiscal 2011, beating the Zacks Consensus Estimate by a penny and 6% higher than $0.77 in the year-ago quarter. However, including certain charges, primarily legal, the company reported a 33% decline in EPS to $0.52.
Revenues were $3.903 billion, up 1.7% compared to the year-ago quarter. However, revenues were marginally lower than the Zacks Consensus Estimate of $3.906 billion. Medtronic recorded 41% of its total sales from the international market.
Sales derived from the international market increased 4% year over year to reach $1.608 billion. However, excluding the $29 million of negative impact due to currency movement, international revenues would have increased 6%.
Medtronic updated its outlook for 2011. Based on estimated market growth of 2-3%, the company expects revenues and adjusted EPS to increase 2%-4% at constant exchange rates (earlier expectation 2%-5% growth) and 8%-10% (earlier guidance 9%-11%).
However, including the impact of acquisition-related dilution (acquisition of Invatec and ATS Medical) and an extra week in the first quarter of fiscal 2010, EPS in 2011 is expected in the range of $3.38-$3.44, down from the earlier guidance of $3.40-$3.48.
For a full coverage on the earnings, read: Medtronic Beats on EPS, Cuts Outlook
Estimate Revision Trends
In accordance with the company’s lowering of expectations, the recent Zacks Consensus Estimate revision trends remain negative for the upcoming period. The challenges being faced by the two largest segments of the company are primarily responsible for the downward revision in estimates.
Over the past 30 days, 16 of the 25 analysts covering the stock have made downward revisions for the third quarter with only 2 upward revisions. However, for the fourth quarter, the number of upward estimates (10) is higher than negative revisions (7). The situation remains unchanged for fiscal 2011 with 11 of 26 analysts lowering their estimates in the past 30 days. Only 2 analysts have moved in the opposite direction.
Revenues derived from two of the largest segments of Medtronic – CRDM and Spinal although the extent of decline was less than the previous quarter. Although Medtronic expects to accelerate CRDM revenues with the launch of new products, the resolution of a manufacturing related issue with the US Food and Drug Administration (FDA) is yet to resolve.
The decline in revenues derived from the Spinal business can be attributed to current macroeconomic conditions, which are causing delays in elective procedures due to high co-pays and expired benefits. Pricing pressure in the US spine market remained similar to the first quarter with low single-digit declines. In Europe, the spine market was negatively impacted by curtailed spending.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for the forthcoming period has been modest. In the past 30 days, estimates for the third quarters have dropped by 2 cents to 83 cents with fourth quarter estimates remaining unchanged. Moreover, estimates for fiscal year 2011 remained flat at $3.41 with estimates for fiscal 2012 being lowered by a penny to $3.65, in the past 30 days.
Although Medtronic recorded a 2% growth in revenues during the second quarter, sales declined in two of its largest segments, CRDM and Spinal. However, the encouraging part is that the extent of the decline is less than the previous quarter and revenues have increased on a sequential basis. Moreover, the company has gained share sequentially in many of its markets including spine, pacemakers, ICDs, DES, transcatheter valves and insulin pumps.
Although several products with strong potential are slated for launch during the fiscal, a manufacturing issue is yet to be resolved. Meanwhile, Medtronic is increasing its focus on emerging markets and emerging therapies and expects these to be major growth drivers going ahead.
Besides, acquisitions should enable the company to record higher revenues in the forthcoming period. However, the company witnesses tough competition from players such as Boston Scientific (BSX) and Johnson & Johnson (JNJ) and operates in a highly competitive environment.
Given the long-term outlook of the company, we are Neutral on the stock which also corresponds to the Zacks #3 Rank (hold) in the short term.
Disclosure: No position