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Medical devices major St. Jude (STJ) is slated to release its third-quarter fiscal 2011 results before the opening bell on Wednesday, October 19. In its second quarter earnings call, the Minnesota-based company stated that it expects third quarter adjusted earnings per share of between 74 and 76 cents.

The current Zacks Consensus Estimates for revenues and earnings for the quarter are $1,371 million and 76 cents a share, respectively.

With respect to earnings surprises, St. Jude has posted four positive surprises in the preceding four quarters and we expect this impressive trend to continue into the third quarter. St. Jude has delivered an average positive earnings surprise of 2.75% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Second Quarter Recap

St. Jude’s second quarter adjusted earnings per share of 85 cents beat the Zacks Consensus Estimates by a penny and exceeded the year-ago earnings of 79 cents. Profit, as reported, slid 5.2% year over year to $241 million (or 72 cents a share) on account of hefty charges related to the company’s AGA Medical acquisition and restructuring of certain activities at its core Cardiac Rhythm Management (“CRM”) segment.

Revenues soared 10% year over year to $1,447 million, led by healthy performances across the company’s Cardiovascular and Atrial Fibrillation franchises as well as strong contribution from international operations. Sales were essentially in line with the Zacks Consensus Estimate.

CRM sales inched up 1% year over year to $793 million, impacted by softness across the ICD and Pacemaker businesses. Atrial Fibrillation and Neuromodulation revenues surged 18% and 9% year over year, respectively, in the quarter. The cardiovascular division had a solid quarter with revenues spurted 35%, boosted by the AGA Medical acquisition.

Estimate Revisions Trend

Agreement

Estimates for the September quarter have a negative bias. Out of 24 analysts, 2 have lowered their forecasts over the past week with none moving in the opposite direction. Over the past month, 3 analysts have chopped their estimates accompanied by a sole positive revision. The current Zacks Consensus Estimate (of 76 cents) represents an estimated 5.32% year-over-year growth.

For fiscal 2011, estimates reflect a bearish sentiment with 3 analysts (out of 28) having pruned their estimates over the last 7 days without any reverse movements. Over the past 30 days, 6 analysts have lowered their forecasts with none moving in the opposite direction. The bearish sentiment appears to reflect the beleaguered U.S. ICD market conditions and a tempered CRM outlook.

Magnitude

Despite the negative movements, estimates for the third quarter as well as fiscal 2011 have been stationary over the past week. However, estimate for fiscal 2011 has reduced by a penny over the past month. The current Zacks Consensus Estimate for fiscal 2011 is $3.27, representing an estimated year-over-year growth of 8.73%.

Our View

We remain impressed by St. Jude’s ability to deliver consistent top line growth and believe that its third quarter results will be supported by new products. The company is poised for incremental opportunities in CRM on the back of strong product momentum.

St. Jude’s Fortify and Unify devices are gaining notable traction. New products should boost the company’s CRM share in 2011, despite weak market conditions. Also, the company’s strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart-failure management.

New irrigated ablation catheters (Safire BLU and Therapy Cool Path) for treating cardiac arrhythmias should help St. Jude sustain the healthy growth in Atrial Fibrillation through 2011. In Neuromodulation, the U.S. approval of the deep brain stimulation/DBS system in Parkinson’s disease represents a promising prospect. In Cardiovascular, synergies of the AGA Medical acquisition and the new Trifecta line of valves should boost results in this division.

However, St. Jude and its compatriots Medtronic (MDT) and Boston Scientific (BSX) are contending in a soft CRM market. Decelerating ICD market growth is expected to weigh on the company’s third quarter CRM results. As witnessed in the second quarter, ICD revenues in the U.S. may decline in the September quarter due to pricing/implant volume pressure, partly offset by sustained strong growth in overseas sales.

St. Jude, in July 2011, slashed its fiscal 2011 CRM sales forecast due to market headwinds and assumption that approval of the highly-expected quadripolar CRT-D is delayed to early fourth-quarter 2011 from mid-2011.

Quadripolar CRT-D, which is viewed as a major new growth prospect in CRM, will be the cynosure of the third quarter call. We expect St. Jude to provide an update on the launch of this product at the call.

he company is expected to offer some visibility on the prevailing CRM market condition/trends, an update on its pipeline as well as guidance for the fourth quarter. Our long-term Neutral recommendation on St. Jude is in tandem with a short-term Zacks #3 Rank (Hold).

Source: St. Jude: Earnings Preview