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Medical devices major St. Jude (NYSE:STJ) is slated to reveal its fourth quarter and fiscal 2011 results before the opening bell on Wednesday, January 25. The Minnesota-based company, on January 9, reported preliminary sales for the fourth quarter. St. Jude expects to post revenues of $1.4 billion for the quarter, up 4% (3% in constant currency) year over year, in line with the Zacks Consensus Estimate.

Per the preliminary data, revenues from the Cardiac Rhythm Management (“CRM”) division, St. Jude’s mainstay, shrunk 4% year over year to $728 million, indicating sustained weakness in the CRM market. ICD revenues dipped 5% to $436 million and pacemaker sales declined 4% to $292 million.

On a positive note, Atrial Fibrillation revenues climbed 13% year over year to $218 million. Neuromodulation sales jumped 12% to $121 million. Revenues from the cardiovascular franchise surged 18% to $340 million.

St. Jude remained optimistic on the earnings front as it expects adjusted (excluding charges) earnings for the fourth quarter to be within its guidance range of 83 cents to 85 cents. The current Zacks Consensus Estimate for the fourth quarter and fiscal 2011 are 84 cents and $3.27, respectively.

Third Quarter Recap

St. Jude’s third-quarter 2011 adjusted earnings per share of 78 cents beat the Zacks Consensus Estimate by a couple of cents. Profit, as reported, climbed 8.7% year over year to $226.5 million (or 69 cents a share) as healthy sales overshadowed special charges related to the restructuring activities at the CRM division, employee termination, collection risk for accounts receivable and improvement of overseas sales infrastructure.

Revenues surged 11.5% year over year to $1,383 million, also ahead of the Zacks Consensus Estimate of $1,370 million. The growth was led by healthy results across the company’s Cardiovascular and Atrial Fibrillation businesses.

Revenues from the core CRM division grew just 2% year over year, plagued by the beleaguered U.S. ICD market. Atrial Fibrillation and Neuromodulation franchises posted healthy growth in the quarter with revenues surging 20% and 10% year over year, respectively. The cardiovascular business had another strong quarter with revenues zooming 37%, buoyed by the contribution from the AGA Medical acquisition.

Estimate Revisions Trend

Agreement

Estimates for the December quarter have barely moved over the past week with just 1 out of 21 analysts having lowered his/her forecast while none raising their estimates. Over the past month, 3 analysts have pruned their estimates accompanied by a sole positive revision.

For fiscal 2011, estimates demonstrate absolute lack of activity over the past week with no movements in either direction. Over the past 30 days, estimates are evenly poised with 2 analysts (out of 23) lifting their forecasts along with a couple of downward revisions.

Magnitude

Given the lack of movements, estimates for the fourth quarter as well as fiscal 2011 have hit a plateau over the past week and month.

With respect to earnings surprises, St. Jude has posted four positive surprises in the preceding four quarters and we expect this positive streak to continue in the fourth quarter. St. Jude has delivered an average positive earnings surprise of 1.93% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Our View

St. Jude’s solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives remain encouraging. A spate of new growth drivers (including new products and emerging markets) are expected to offer opportunities for accelerated sales growth over the next few years.

We are impressed by St. Jude’s ability to deliver consistent top-line growth and believe that its December quarter results will be supported by new products. The company’s Fortify and Unify devices are gaining notable traction and increased penetration of these products should enable it to expand its position in CRM.

The newly approved Unify Quadra cardiac resynchronization therapy defibrillator (“CRT-D”), the industry's first quadripolar pacing system, should help the company gain ground in the highly competitive U.S. defibrillator market in 2012.

In Atrial Fibrillation, new irrigated ablation catheters for treating cardiac arrhythmias should enable St. Jude to sustain the healthy growth momentum. The U.S. approval of the deep brain stimulation (“DBS”) system in Parkinson’s disease represents a promising prospect in Neuromodulation. St. Jude may provide some color on the possible timeline for DBS approval in this indication in its fourth quarter commentary.

On the Cardiovascular front, synergies of the AGA Medical acquisition and the new Trifecta line of valves should boost results in this division. Moreover, emerging opportunities across a slew of fast-growing therapy areas such as transcatheter aortic valve implant (“TAVI”), percutaneous mitral valve repair (“PMVR”), left atrial appendage (“LAA”) and renal denervation should set the stage for growth in the years ahead.

However, St. Jude and its peers Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX) are contending in a soft CRM market. A still choppy U.S. defibrillator market continues to weigh on the company’s CRM results as reflected in the pre-announced December quarter results.

Moreover, pressure on the company’s ICD business has been exacerbated by the Riata defibrillator lead (a thin wire) issue. The U.S. Food and Drug Administration (“FDA”) issued, in late 2011, an urgent recall of these leads given the potential risk of serious injury or patient death. We are also cautious about the dilutive impact of acquisitions and foreign exchange headwinds.

We expect the company to offer some visibility on the prevailing CRM market condition/trends, an update on its pipeline as well as guidance for 2012 in its fourth quarter call. Our long-term Neutral recommendation on St. Jude is in agreement with a short-term Zacks #3 Rank (Hold).

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Source: St. Jude Medical: Earnings Preview