Medtronic (NYSE:MDT) is scheduled to release its Q2 fiscal 2014 earnings on November 19. Last quarter, the company reported operational sales growth of 3%, at the lower end of its guidance of 3%-4% for fiscal 2014. The operational growth figure would have been even lower than 3% if adjusted for the unusual spike in sales of CoreValve Systems in Germany during the quarter. However, management reiterated its outlook for the full year and believes that 3%-4% growth is achievable. We agree with this outlook, and believe that Medtronic should be able to achieve this target in the near future. Below we discuss the factors which are likely to drive its performance.
Our price estimate for Medtronic’s stock is currently around $56, which is about in line with the market price.
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Cardiac Rhythm Management Is Stabilizing
Cardiac Rhythm Management (CRDM) is Medtronic’s largest division, accounting for almost 30% of total revenue. The division has been under pressure over the last few years due to weak demand for defibrillators and pacemakers in the U.S. However, the situation seems to be gradually stabilizing as the division reported no sales decline in the last quarter despite a weakness in bulk purchases of defibrillators. Medtronic’s bulk purchase orders reached their lowest level in six years during the last quarter. This happened because it launched some new products – such as the Evera implantable cardioverter defibrillator (ICD) and Viva CRT-D (ICD with pacing capabilities) – during the period and hospitals suspended their bulk purchases as they waited for these new products to be incorporated into their purchase agreements. 
This quarter, we expect Medtronic’s bulk purchases to be back on track as the revision of purchase agreements is likely to have been completed. As a result, CRDM should report better year-on-year performance than last quarter. Higher prices of newly launched products should also boost sales in the segment.
Neuromodulation Business Also Likely To Perform Better
Similar to CRDM, Medtronic’s Neuromodulation segment sales were also impacted by the launch of new products in Q1. It launched a product called MRI Safe in the U.S., and immediately witnessed a decline in the sales of older devices. Meanwhile, the sales of MRI Safe could not increase substantially despite strong demand due to supply constraints. As a result, the year-on-year sales growth for the segment was stuck at 2.5% even though it could have been higher. This quarter, we expect the supply constraints in MRI Safe to have eased, leading to higher growth in the Neuromodulation segment.
Other Businesses Likely To Maintain Performance
Other than CRDM and Neuromodulation, the major business divisions within Medtronic are Coronary, Structural Heart, Endovascular, Spine, and Surgical Technologies. Other than the Spine segment, all of the divisions have been growing in recent quarters, primarily due to strong performance in international markets. Sales in the Spine division have been declining since 2011 due to concerns about the safety of the INFUSE Bone Graft, and are likely to remain subdued in the near term.
In almost all other segments, we expect international markets to drive growth. International sales, which accounted for 46% of total revenue during the last quarter, increased by 9% year-on-year in Q1, primarily driven by emerging markets, where revenue increased by 15%. We believe that these markets will continue to boost Medtronic’s performance as they become a larger constituent of its top line. Emerging markets currently represent around 12% of the company’s overall revenue, and Medtronic wants to gradually increase this percentage to 20%.Notes:
- Medtronic’s Management Presents at Morgan Stanley Healthcare Conference (Transcript), SeekingAlpha, September 10, 2013 [↩]