How Did Medtronic Fare In Q1’17 Earnings?

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Medical technology company Medtronic (NYSE: MDT) reported its Q1 earnings for fiscal 2017 on August 25th. (Fiscal years end with April.) The Diabetes segment was the best performer with its revenue growing by 2% on year-over-year basis, while other divisions experienced decreases. Going forward, we expect this segment to increase its market share on account of its strong portfolio of products in both intensive and non-intensive insulin management. Moreover, the Cardio Vascular Group should also give a solid performance on back of product launches. At the company level, the recent acquisitions will continue to contribute to revenue growth for the year ahead. Further, Medtronic reported lower tax rate for the quarter. We expect the tax rate to be slightly higher for the rest of fiscal 2017. Moreover, as as expected, synergies from Covidien acquisition have started to moderate. The company reiterated its revenue and EPS guidance for the remainder of the fiscal year.

Last quarter’s revenues were in line with expectations and decreased by about 1% on account of an extra week in the prior year and currency headwinds. Furthermore, on a non-GAAP constant currency, constant week basis, the company reported a reduced gross margin, due to changes in revenue mix.  However,  operating earnings improved on account of lower SG&A and lower other operating expense. Below are key performance metrics as reported by the company:

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Our price estimate of $91 for Medtronic is slightly above the current market price.

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See our complete analysis for Medtronic stock here

Strong Product Portfolio To Drive Performance Of Diabetes And Cardio Vascular Group

In the diabetes segment, growth is likely to come from continued strong adoption of MiniMed 640G (outside of U.S.), iPro2 CGM and the recent FDA approval of MiniMed 630G. Guardian Connect CGM system received CE Mark approval recently and, post FDA approval (expected in the second half of fiscal 2017), we expect it to experience strong demand.

In the cardio vascular group (CVG), we expect continued growth from Micra Transcatheter Pacing System (TPS) and MRI-implantable defibrillator. But in the transcatherer aortic valve device, we expect Medtronic to face competition from Edward Lifesciences. Further, management described Enveo R (used to deliver Evolut R CoreValve) issues to be related to training and, expects it to not have any material effect on the adoption of Evolut CoreValve.

New Acquisitions To Boost Revenue For The Year Ahead

The recent acquisition of Simth & Nephew’s gynecology business and majority stake in NOK should help the Minimally Invasive Therapies group’s growth. With  CVG, the earlier than expected closure of HeartWare acquisition is further expected to boost revenue. HeartWare’s acquisition provides Medtronic with strong product in the $800 million ventricular assist device market.

Services And Solutions Initiative Is Of Strategic Importance

The company lists three focus areas for growth going forward – new therapies, emerging markets and services & solutions. The performance of services & solutions was below guidance in fiscal Q1 2017. But we consider it to be an important strategic move. Services & solutions agreement would enable Medtronic to append its product, generating additional revenue. We expect this initiative will help create an ecosystem leading to greater adoption of Medtronic’s product.

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