Diabetes Will Lead Medtronic’s Near Term Earnings Growth

Medtronic (NYSE:MDT) recently posted its Q2 FY19 numbers, which were better than street estimates, led by a steady growth across its segments. The company also revised its revenue guidance upward, and expects strong growth in the Diabetes segment for the full year. We currently forecast low single digit growth in overall revenues for fiscal 2019, primarily led by Diabetes, and the Restorative Therapies Group. We have created an interactive dashboard ~ What Is The Near Term Outlook For Medtronic ~ on the company’s expected performance in fiscal 2019 and 2020. You can adjust the revenue and margin drivers to see the impact on the company’s overall earnings, and price estimate. Below we discuss our forecast in detail.

Expect Diabetes Segment To See Strong Growth In The Near Term

Diabetes segment revenues were up in the high-20s percent in the first half of fiscal 2019. We forecast the revenues to grow in mid-teens to around $2.50 billion for the full fiscal year. This growth will primarily be led by its MiniMed 670G hybrid closed loop system, which is seeing strong demand in the U.S. The company plans to launch it in international markets, and this should bode well for the segment. 670G is world’s first hybrid closed loop system that optimizes glycemic control for patients with type 1 diabetes. Also, the new Guardian Connect CGM system will aid the overall segment revenue growth. Guardian Connect is a continuous glucose monitoring system designed for people on insulin injections. It can be connected with apps on mobile phones and predict and alert about highs and lows of glucose levels. The company expects it to be a long term revenue stream. The standalone CGM market size is around $1 billion, and it will be interesting to see how much  share can the Guardian Connect gain in the coming quarters. We don’t expect any significant changes to the company’s gross margins, and forecast it to remain around 70% in the near term.

Cardiac & Vascular Group And Restorative Therapies Group Will Likely See Mid-Single Digit Growth

Cardiac & Vascular Group revenues have grown in mid-single digits in the recent years, primarily led by its Coronary and Structural Heart (CSH) business, and we expect this trend to continue in the near term. We currently forecast the segment revenues to grow in mid-single digits in the current fiscal, and in low single digits in the subsequent years, primarily led by the higher demand for Evolut PRO valve, and Resolute Onyx drug-eluting stents. Also, Aortic, Peripheral & Venous (APV) business is seeing strong demand for VenaSeal closure system, and IN.PACT Admiral drug-coated balloon (DCB). However, Cardiac Rhythm & Heart Failure will likely continue to see slow growth, given the competition in the business.

Looking at the Restorative Therapies Group, we forecast the segment revenues to grow in mid-single digits in the near term, led by Pain Therapies, which we expect to grow in mid-teens for the full fiscal year 2019. The company is seeing higher sales of its Intellis platform for spinal cord stimulation, along with its Targeted Drug Delivery therapy, and we expect it to continue to drive near term growth. Apart from Pain, Brain Therapies is also seeing strong growth for Neurovascular and Neurosurgery, and this should aid the overall segment growth.

Overall, we expect the Diabetes segment to lead near term growth for Medtronic. We currently forecast adjusted earnings of $5.15 per share in fiscal 2019, and a price to earnings multiple of 21x by the end of fiscal 2019, to arrive at our price estimate of $110 for Medtronic, which is at a premium of more than 15% to the current market price.

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