How Did Medtronic Fare In Q4, And What Can We Expect From Fiscal 2020?

Medtronic (NYSE:MDT) recently reported its Q4 fiscal 2019 results, which were above our estimates, led by the Restorative Therapies Group. This note details the company’s Q4 performance, and Trefis’ forecasts for the full fiscal 2020. You can view our interactive dashboard analysis ~ How Did Medtronic Fare In Q4, And What Can We Expect From Fiscal 2020? In addition, you can see more of our data for Health Care companies here.

What are Medtronic’s key sources of revenue?

• Medtronic reports its revenues under four segments ~ Cardiac & Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes.
• Cardiac & Vascular Group includes cardiac rhythm management devices for the diagnosis, treatment, and management of heart rhythm disorders and heart failure. It also includes coronary balloons, drug-coated balloons, and thoracic stent graft systems, among others. The segment revenues of $11.51 billion in fiscal 2019 accounted for 38% of the company’s total revenues.
• Minimally Invasive Therapies Group includes devices and therapies for neurological problems and imaging systems among other products. The segment revenues of $8.48 billion in fiscal 2019 contributed 28% to the company’s top line.
• Restorative Therapies Group primarily includes devices and implants for conditions relating to the spine, musculoskeletal system, brain, and nerves. The segment generated revenues of $8.55 billion in fiscal 2019, accounting for 27% of the company’s total revenues.
• Diabetes includes sales of diabetes management products, which primarily consist of insulin pumps, and continuous glucose monitoring systems. The segment revenues of $2.58 billion in fiscal 2019 contributed 8% to the company’s total revenues.

How did Medtronic’s top line fare in Q4?

• Medtronic’s total revenues were flat y-o-y at $8.15 billion Q4 fiscal 2019. However, they were up 3.6% on a constant currency basis.
• This can partly be attributed to currency headwinds, and weakness in Cardiac & Vascular Group, which offset growth seen in Restorative Therapies Group and Minimally Invasive Therapies Group.
• The company’s revenue has largely trended higher in the recent quarters from $7.38 billion in Q1 fiscal 2019 to $8.15 billion in Q4 fiscal 2019.

What impacted the Q4 earnings?

• Adjusted earnings per share grew 8% from $1.42 in Q4 fiscal 2018 to $1.54 in Q4 fiscal 2019.
• The growth in earnings can be attributed to 140 bps improvement in adjusted operating margins, led by the company’s focus on its Enterprise Excellence Program, and lower share count.
• Medtronic’s Enterprise Excellence is its restructuring program, which was announced last year, and it is aimed at gross savings of $3 billion by 2022.

How does the revenue growth in the recent quarters compare to its peers?

• Medtronic’s average revenue growth rate of 2.3% is higher than its peers. Medtronic’s revenue grew from $7.37 billion in Q3 fiscal 2018 to $8.15 billion in Q4 fiscal 2019.
• Intuitive Surgical’s revenue grew at an average of 2.1% from $892 million in Q4 2017 to $974 million in Q1 2019.
• Boston Scientific’s revenues have grown at an average of 0.8% from $2.41 billion in Q4 2017 to $2.56 billion in Q1 2019.
• Abbott’s revenues have declined at an average of -0.1% from $7.58 billion in Q4 2017 to $7.54 billion in Q1 2019.

How much can Medtronic’s top line grow in fiscal 2020?

• Medtronic’s total revenues will likely grow 4.1% to $31.8 billion in fiscal 2020. This growth will likely be led by Restorative and Minimally Invasive Therapies Group.
• Cardiac & Vascular Group revenues could grow in low single-digits to $11.8 billion in fiscal 2020. The segment should see continued growth in Evolut PRO Valve. However, Q4 segment performance was impacted by the replacement cycle for its  drug-coated balloons among other products. The sales were likely impacted by the U.S. FDA probe on paclitaxel-eluting stents and balloons. The company has guided for a low single-digit growth in revenues in fiscal 2020, led by its loop recorder, and catheters.
• Minimally Invasive Therapies Group could see revenues growth of 4.6% to $8.9 billion in fiscal 2020, likely led by continued demand for its patient monitoring products, along with sealing instruments, and advanced stapling products. The company will also launch its soft tissue robotics program outside the U.S. in fiscal 2020, and it has guided for a mid-single-digit segment revenue growth for the full fiscal.
• Restorative Therapies Group could see revenue growth of 4.5% to $8.6 billion in fiscal 2020, led by higher demand for its brain and pain therapies, which have seen strong growth in the recent quarters, led by its Intellis spinal cord stimulation platform, and StealthStation surgical navigation systems, among other products, and this trend should continue in the near term.
• Diabetes could grow in high single-digits to $2.6 billion in fiscal 2020, benefiting from the expansion of 670G, along with expected launch of 780G, which is an advanced version of its hybrid closed-loop system with features around carb counting, remote monitoring, and remote software downloads, among others.

How much can Medtronic’s full fiscal earnings grow?

• Medtronic’s full fiscal 2020 earnings will likely be $5.50 per share on an adjusted basis, reflecting 5% growth over the prior fiscal.
• Earnings growth can be attributed to higher revenues and lower share count, along with slight improvement in margins, as guided by the company.
• Average consensus earnings for fiscal 2020 ~ $5.44.

What is the price estimate of Medtronic based on the above?

• Our price estimate of $119 for Medtronic is based on a 22x price to earnings multiple, and earnings of $5.50 per share in fiscal 2020.
• The multiple for Medtronic’s valuation is close to that of its peers, including Abbott and Boston Scientific.

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