Medtronic’s Earnings Preview: New Product Launches And Synergies From Covidien Acquisition Likely Drove Growth In Q3’16

Leading medical device manufacturer Medtronic (NYSE:MDT) will report Q3 fiscal 2016 earnings on  March 1st. (Fiscal years end with April.) We expect the company to see growth coming in from the market expansion due to new product launches and the synergies associated with the Covidien acquisition. Moreover, strong adoption of the company’s wireless pacemaker, the Micra TPS (Transcatheter Pacing System), might have provided incremental revenues in Q3. However, macro and foreign currency headwinds continue to offset Medtronic’s growth across its businesses. Foreign currency headwinds alone likely affected the company’s revenues to by a significant degree in Q3. Nevertheless, Medtronic’s successful three prong growth strategy, which revolves around therapy innovation, globalization and economic value, will continue to drive future growth.

Our price estimate of $70 for Medtronic is around 10% below the current market price.

See our complete analysis for Medtronic stock here

Cardiovascular And Therapy Divisions Are Major Growth Contributors

Medtronic likely saw strong growth in Q3 coming in from the cardiovascular division, driven by market expansion in areas such as transcatheter aortic valve replacement, drug-coated balloons, AF ablation and insertable diagnostics. Medtronic’s cardiovascular group accounted for 35% of the revenues for the company in Q2. Further, the outlook for Medtronic’s cardio vascular group is all the more positive as the company continues to make progress in bringing its revolutionary Micra  Transcatheter Pacing System (TPS) to market in the U.S. Additionally, the company’s new therapies division likely continued to be a major growth contributor. In Q2 Medtronic’s therapies division accounted for three quarters (or 420 basis points) of growth for the company.

Medtronic Continues To Derive Synergies From The Covidien Acquisition

Medtronic reported that it has been successful in freeing trapped cash to the tune of $9.3 billion from the Covidien acquisition in Q2. Going ahead, we may see more product launches by the company as it plans to deploy this cash in areas which create high shareholder value. Apart from providing higher returns to shareholders, the free cash flow will also help Medtronic in paying off debt, and pursuing other targeted acquisitions.

Furthermore, the company likely realized significant cost synergies too from the Covidien acquisition. In Q2, the company realized significant savings in SG&A expenses and the improvement in non-GAAP operating margins from the synergies resulting from the Covidien acquisition. Medtronic expects the trend to continue in the near term, with a total of $300 million to $350 million in cost savings in the current fiscal year. Over the next three years through fiscal 2018, the company expects to generate cumulative cost savings of at least $850 million.

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