Medtronic Earnings Preview: New Products And Emerging Markets In Focus

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Medical device maker Medtronic Inc. (NYSE: MDT) is expected to release its first quarter fiscal 2015 results Tuesday, August 19. (Fiscal years end with April.) In the previous quarter, the company reported revenue growth of 3.3% year over year  to $4.57 billion, driven by growing acceptance of new products and robust sales in emerging markets. The company’s largest divisions, Cardiac Rhythm Disease Management (CRDM) and Cardiovascular, continued to grow in low single digits, driven by sales growth of over 50% in Atrial Fibrillation (AF) and 9% in the Structural Heart business. Other businesses such as Neuromodulation, Surgical Technologies and Diabetes also registered robust revenue growth, which offset declines in the Spinal division. International sales accounted for 47% of total revenues for the medical device maker, driven by 14% year-over-year growth in emerging markets. [1]

When Medtronic comes out with its Q1 FY15 earnings, we expect sales growth to meet the company’s guidance of 3-5%. Most of the company’s major businesses are likely to sustain their growth momentum as new products have found good acceptance. We also expect gross margins to remain stable near 75% as Medtronic’s cost saving efforts offset growing pricing pressures and product quality issues in some divisions.

Our price estimate for Medtronic’s stock is currently around $60, implying a discount of less than 5% to the market price.

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International CRDM Growth Likely to be Offset by Slipping Sales in the U.S.

CRDM is Medtronic’s largest division, accounting for about 30% of total sales. Following weak demand in early FY14, ICD (i.e., Implantable Cardioverter Defibrollator) sales have recently improved because of growing acceptance of the company’s new products, such as Reveal LINQ insertable cardiac monitoring system, Evera ICD, Viva XT CRTD (ICD with pacing capabilities) and Attain Performa Quadripolar (APQ) leads. In the previous quarter, the division reported sales growth of a modest 2% year over year driven by solid growth in Atrial Fibrillation (AF), partially offset by declining ICD sales.

Following the impressive uptake of its APQ lead in Japan in the last two quarters, the company received United States Food and Drug Administration (FDA) approval for this product last week. The medical device maker also received the CE Mark (i.e., European Conformity Mark) for its Evera MRI SureScan ICD in the later half of the fiscal fourth quarter and should see meaningful sales in FY15. It is the world’s first approved ICD system which can safely pass through a full-body MRI scan. [2]

Growing acceptance of the Reveal LINQ system contributed to sales growth in the diagnostics business last quarter. In the AF division, sales grew 20% on a constant currency basis on account of solid growth of the Arctic Front CryoAblation System and the launch of the Pulmonary Vein Ablation Catheter (PVAC) Gold system. Going forward, we expect sluggish U.S. sales to offset international market gains in the overall CRDM business. Medtronic’s global market share is unlikely to improve significantly unless its performance in the U.S. improves.

Steady Cardiovascular Sales Expected

Cardiovascular consists of the Coronary, Structural Heart and Endovascular businesses, which offer products such as stents, heart valves and renal denervation systems for treating hypertension. The Cardiovascular division, contributing over 20% to Medtronic’s sales, grew 1.3% year over year, registering sales of over $1 billion in the last quarter. Sales of drug eluting stents (DES) increased 2% on an operational basis to $288 million, driven by strong global sales of the company’s Resolute Integrity DES. Consistent DES growth was partially offset by a sales decline in bare-metal stents and renal denervation.

The Structural Heart business reported 9% sales growth in the previous quarter, as the CoreValve Transcatheter Aortic Valve (TAVR) system continued its strong performance in international markets as well as the U.S. Following its settlement with Edwards in the patent infringement issue in May, we expect Medtronic to report a significant improvement in its U.S. TAVR sales going forward, as it ramps up its training facilities in the country. [3]

Emerging Markets Likely to Remain Key

International sales accounted for 47% of Medtronic’s total sales in Q4 FY14 and grew 5% year over year on a constant currency basis, better than growth in the U.S. Emerging markets contributed about 27% of overall international revenues and saw robust growth of 14% year over year to $571 million. In emerging markets, Africa and the Middle East were strong performers, with revenues growing 29%. However, there were strong headwinds in Russia and India, where sales declined in double digits.

The company expects sales from emerging markets, including Asia-Pacific, Greater China and South Asia, to continue to grow in mid teens as it works on optimizing its business channels and establishes sustainable and broader business partnerships with national governments. The medical device major expects emerging markets to contribute 150 to 200 basis points to its overall sales growth in fiscal 2015. [1]

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Notes:
  1. Medtronic’s CEO Discusses F4Q 2014 Results – Earnings Call Transcript, Seeking Alpha, May 20, 2014 [] []
  2. Medtronic Press Release, August 7 2014 []
  3. Medtronic to Pay Edwards to Settle Heart Valve Lawsuit, Bloomberg, May 21 2014 []