Medtronic: Earnings Have Climbed, The Stock Hasn't

Shares of Medtronic (MDT) were much higher as of Tuesday. Actually, the stock is really gaining back much of what it lost over the past month. MDT got pounded one month ago with the company said that it would halt distribution of certain heart defibrillator wires.

The good news is that the sales impact is less than what the company, and Wall Street, expected. Medtronic said that the Sprint Fidelis heart wire hurt second-quarter earnings by nine cents to 10 cents per share. For the quarter, Medtronic earned 58 cents a share which was a penny less than last year. Sales rose 1.5% to $3.12 billion.

The AP reports:

"This was a tough quarter," President and CEO Bill Hawkins said. "We feel we have made solid progress over the past five weeks" since the recall was announced, "but clearly, much work still remains."

Medtronic reported $1.15 billion in revenue in its largest unit, Cardiac Rhythm Disease Management, which makes pacemakers and defibrillators. The recall hurt revenue in that unit by $130 million, and it also absorbed $31 million in costs to write off the Sprint Fidelis leads recalled during the quarter. Last month, Medtronic had predicted a $150 million to $250 million loss of second-quarter revenue and inventory write-off costs of $15 million to $20 million.

When the Sprint Fidelis problems were discovered, Medtronic moved quickly to go back to its Sprint Quattro lead, including seeking regulatory approval to sell it in Japan. Hawkins said the company expects approval for Japanese sales by April.

One Medtronic product has actually benefited from the recall: CareLink, Medtronic's system for monitoring its implanted defibrillators. The potential to spot problems such as the broken Sprint Fidelis wires has prompted more interest in CareLink, said Pat Mackin, president of the Cardiac Rhythm Disease Management unit.

"I can tell you that I've personally been to centers that were not interested in CareLink, and they want to put every single patient on it," he said.

Sales grew in other Medtronic units. Spinal revenue rose 10 percent to $660 million, and CardioVascular revenue (which includes stents) grew 8 percent to $490 million.

Medtronic said revenue from outside the U.S. grew 12 percent to $1.17 billion, including $73 million from favorable currency exchange rates.

Medtronic doesn't give quarterly guidance, but Ellis said he would not be surprised if the consensus of analysts remained around $2.52 per share for the full year. Analysts polled by Thomson Financial were predicting full-year earnings of $2.54 per share. Ellis said revenue should accelerate in the second half of the year.

Here's a look at MDT's sales and earnings for the past several quarters:

Quarter...........EPS.............Sales
Jul-01............$0.28...........$1,455.70
Oct-01...........$0.29...........$1,571.00
Jan-02...........$0.30...........$1,592.00
Apr-02...........$0.34...........$1,792.00
Jul-02............$0.32...........$1,713.90
Oct-02...........$0.34...........$1,891.00
Jan-03...........$0.35...........$1,912.50
Apr-03...........$0.40...........$2,148.00
Jul-03............$0.37...........$2,064.20
Oct-03...........$0.39...........$2,163.80
Jan-04...........$0.40...........$2,193.80
Apr-04...........$0.48...........$2,665.40
Jul-04............$0.43...........$2,346.10
Oct-04...........$0.44...........$2,399.80
Jan-05...........$0.46...........$2,530.70
Apr-05...........$0.53...........$2,778.00
Jul-05............$0.50...........$2,690.40
Oct-05...........$0.54...........$2,765.40
Jan-06...........$0.55...........$2,769.50
Apr-06...........$0.62...........$3,066.70
Jul-06............$0.55...........$2,897.00
Oct-06...........$0.59...........$3,075.00
Jan-07...........$0.61...........$3,048.00
Apr-07...........$0.66...........$3,280.00
Jul-07............$0.62...........$3.127.00
Oct-07...........$0.58...........$3,124.00

Below is a chart of Medtronic's stock and earnings-per-share. The stock is in blue and follows the left scale. The earnings are gold and follow the right scale. I scaled the lines at a ratio of 25-to-1, so when the lines cross, that's a P/E ratio of 25. Even though earnings have climbed, the stock hasn't.