Medtronic: Revised $45 Price Estimate Following Earnings

Medtronic (NYSE:MDT) announced its quarterly earnings for Q1 2013 on August 21, ^[1] registering a decline in its key Pacemakers & Defibrillators and Spinal divisions, in line with our expectations. However, growth in Cardiovascular, Diabetes and Surgical Technologies businesses more than offset the decline as overall revenue grew by 5% to $4.14 billion. Gross margins declined slightly mainly due to foreign exchange fluctuations. The company maintained its 2012 earnings outlook.

In the wake of its earnings announcement, we have increased our price estimate for the company from $41 to $45, which is about 15% ahead of the market price. 

See our complete analysis of Medtronic here

On a quarterly basis, the company recorded a 5% (2% excluding currency effect) decline in revenue from Pacemakers & Defibrillators due to a decline in overall demand for implantable defibrillators. The silver lining was that the company’s defibrillator sales outperformed (excluding currency effect) the overall market. The business is stabilizing after being hammered by a U.S. Department of Justice investigation and a negative report from the Journal of the American Medical Association in January 2011. However, the company was not able to capitalize on the opportunity emerging from a product recall from its one of the largest competitors, St. Jude Medical. Pacemaker sales disappointed in the quarter, and as such we have lowered our 2012 market share projections.

The spinal division witnessed a decline due to weaker demand for its main product Infuse, a bone graft paste used in spinal surgery. The decline was in line with our expectation and we maintain our market share forecast for the division.

Stronger sales of heart valves and heart stents in the Cardiovascular segment offset the aforementioned decline in revenue.  In addition, the Diabetes franchise boosted sales on the back of insulin pumps. Sales from Surgical Technologies also topped our expectations. Due to this continued strong performance, we have slightly increased our market share projections for these divisions.

Sales from emerging markets continued to show double digit growth, excluding currency impacts. Still, the overall contribution of emerging markets to the company’s overall revenue stands at 11%, well below its target of 20%.

Margins Estimates Increased

While the company incurs most of its costs in U.S. dollars, sales are generated from several countries. A stronger U.S. dollar leads to a decline in sales even as costs remain the same. This, consequently, leads to a decline in gross margins. Despite this impact, the company’s margins were slightly above our expectations.

While we have increased our margin expectations for 2012, we still believe that margins will decline to an extent going forward. We expect the company will continue to face pricing pressures following the U.S. healthcare reforms and European austerity measures.

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1. Medtronic Reports First Quarter Earnings, Company Press Release, 2012 [↩]