Medtronic Earnings: Recently Launched Products And Incremental Revenues From Covidien Acquisition Help Post Strong Quarter

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Leading medical device manufacturer Medtronic (NYSE:MDT) reported its Q3 fiscal 2016 earnings on March 1st. (Fiscal years end with April.) The company posted revenue growth of 6% driven by incremental revenues from Covidien acquisition and a strong growth across each of Medtronic’s business divisions. Further, Medtronic saw growth coming in from the market expansion due to new product launches.  Although Medtronic’s non-GAAP EPS stood at $1.06 in Q3, foreign currency headwinds continued to offset Medtronic’s growth across its businesses, affecting the company’s revenues by a significant degree in Q3. Nevertheless, it was a strong quarter for Medtronic and we expect the momentum to continue going ahead.

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

See our complete analysis for Medtronic stock here

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Foreign Currency Effects Continue To Offset Bottom-Line Growth

Although the company saw a gross margin improvement of 140 basis points year over year in Q3, it was completely offset by the impact of foreign currency translation. Currency effects negatively impacted Medtronic’s revenues by $344 million in Q3. However, the company is trying to offset the currency headwinds by undertaking hedging programs and stretching its operations. Also, it must be noted that Medtronic generated significant free cash flow in Q3, which can be used to reduce debt, invest in expanding operations and provide returns to shareholders through dividends. The company generated $1.8 billion of free cash flow in Q3 and is confident of generating $40 billion of cash flows over the next five years.

Strong Growth Momentum Can Be Sustained Broadly Across All Segments

Medtronic’s cardiovascular group, which accounted for 35% of total revenues, grew by 7% in Q3. The company’s cardiovascular division’s growth was driven by market expansion in areas such as transcatheter aortic valve replacement, drug-coated balloons, AF ablation and insertable diagnostics. 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. and Japan. Medtronic claims to have had a successful presentation to the FDA advisory panel two weeks ago. However, the company’s growth was primarily driven by new therapies division, which accounted for approximately 350 basis points (or two-thirds) of total company growth.

Covidien Acquisition Providing Incremental Revenues

The combined entity Medtronic and  Covidien posted a 6% year-over-year revenue growth in Q3. However, if we exclude the previous year revenues of Covidien, the revenue growth comes out to be 61%. It must be noted that Medtronic’s new division – minimally invasive therapies group(MITG), which was earlier a part of Covidien acquisition, contributed to 33% of overall revenues in Q3. Further, Medtronic plans to launch more than 20 new products in MITG going ahead. According to the company, these new products can provide incremental revenues of around $500 million over the next three years.

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