St. Jude Medical: Earnings Preview

| About: St. Jude (STJ)
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Medical devices major St. Jude Medical (NYSE:STJ) is slated to reveal its first quarter results before the opening bell on Wednesday, April 18. The current Zacks Consensus Estimate for the first quarter is 83 cents.

Fourth Quarter Recap

St. Jude's fourth-quarter 2011 adjusted earnings per share of 86 cents beat the Zacks Consensus Estimate by a couple of cents and transcended the year-ago earnings of 75 cents. Profit, as reported, slid 21% year over year to $163.4 million (or 51 cents a share) as healthy sales were overshadowed by special charges.

The Minnesota-based medical technology giant observed that two of its four divisions posted better-than-forecast results in the fourth quarter, despite the weakened MedTech industry fundamentals.

Revenues rose 4% year over year to $1,406.9 million, just ahead of the Zacks Consensus Estimate of $1,400 million. Double-digit growth across the company's Atrial Fibrillation, Cardiovascular and Neuromodulation segments were partially offset by the decline in the core CRM division.

Revenues from the core CRM division fell 4% (down 6% in constant currency) year over year, indicating sustained softness in the CRM market. ICD revenues dipped 5% while pacemaker sales declined 4%. On the positive side, Atrial Fibrillation revenues climbed 13%. Neuromodulation sales jumped 12%. The Cardiovascular franchise continued its healthy growth streak with sales surging 18%, backed by the contributions of AGA Medical.

Estimate Revisions Trend


Estimates for the March quarter demonstrate absolute lack of activity over the past week with no movements in either direction. Over the last 30 days, there was a sole positive revision (out of 17 analysts) with no case of pruning of estimate.

A similar pattern was repeated for 2011 with no movement, in either direction, over the past week. Over the last 30 days, one analyst (out of 21) lifted his/her estimate with no downward drift.


Given the lack of movement, 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 first quarter. St. Jude has delivered an average positive earnings surprise of 2.19% 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 remain impressed by St. Jude's ability to deliver consistent top-line growth and believe that its March 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 first 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. 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, and update on its pipeline as well as guidance for 2012 in its first quarter call. We currently have a Neutral recommendation on St. Jude. The stock currently retains a Zacks #2 Rank, which translates into a short-term "Buy" recommendation.