Medtronic Q3 Earnings 2015 Exceeds Market Expectations

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Feb 19, 2015
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Medical device manufacturer Medtronic Plc. (MDT, Financial) reported a better-than-expected Q3 2015 profit, buoyed by growth in sales in the company’s cardiac and vascular venture that logged in sales of $2.22bn and accounted for more than half of Medtronic’s overall sales for the quarter. Sales at the company’s cardiac and vascular business jumped 10%, excluding the impact of a stronger dollar, with robust sales of heart devices including Structural Heart and Low Power driving a 5% growth. With around 43% of Medtronic’s revenue in the third quarter coming from overseas sales, the company reported a 2% drop in international sales to $1.86bn owing to a stronger dollar. However, international sales grew 7% on a constant currency basis.

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Robust Sales across Portfolio Boosts Growth

Medtronic reported a 10.9% year-over-year increase in its adjusted EPS (earnings per share) at $1.01 in the quarter ending 31st Jan 2015. Concurrently net income rose 28% to $977 million compared to the prior-year quarter, translating into a 31% increase to 98cents per share. Revenues were also up 3.7% (or 8% CER) on a year-over-year basis to touch $4.318bn, surpassing the expert consensus estimate of $4.260bn. Although international sales dipped 2% compared to the prior-year quarter, Medtronic’s focus on emerging markets helped garner a 6% (or 12% at CER) growth in revenues to $542 million from these regions. Emerging markets now account for 12.6 percent of Medtronic’s overall revenue.

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Although Medtronic completed its $42.9bn acquisition of Irish business Covidien Plc in January, the merger did not impact its operational results for the third quarter. The acquisition of Covidien has allowed Medtronic to expand its existing portfolio of insulin pumps, spinal implants, heart devices and other such devices to include areas such as laparoscopic procedures and weight-loss surgery.

While Medtronic reported a 12% at CER year-over-year jump to $1.269bn in revenue from its Cardiac Rhythm & Heart Failure offerings, revenues at High Power and Low Power grew 4% and 17% at CER to $650 million and $489 million respectively. Concurrently, the company’s Structural Heart unit logged in a 22% at CER growth to $330 million, while AF & Other revenues jumped 30% year-over-year to touch $130 million. Sales at the company’s other segments such as Aortic & Peripheral, Spine, Surgical Technologies, Diabetes and Neuromodulation also recorded single-digit percentage growth in the third quarter compared to the prior-year quarter. However, revenues from Medtronic’s Coronary unit dropped 2% at CER to reach $407 million.

Outlook for Q4 2015 and Beyond

Medtronic expects a growth of 4-6% at CER on a pro-forma basis for Q4 2015. The company’s acquisition of Covidien gives the combined entity around $7bn in annual free cash flow, with around 60% coming from overseas and therefore outside the domestic US tax net. Medtronic foresees cash earnings in the $1.08-$1.13 per share range for the fourth quarter, with currency headwinds trimming around $420-$480 million from its expected revenue of $7-$7.1bn.

While the strong dollar is likely to continue weighing on Medtronic’s results in FY2016, the company has lined up a slew of new offerings for the year ahead. Moreover, the acquisition of Covidien will allow it to operate in four key markets namely China, Middle East & Africa, the Americas and Asia Pacific. The combined entity will also help expedite Medtronic’s fundamental strategies of globalization, therapy innovation and economic value.

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Medtronic also projected a revenue growth in the mid-single digits for fiscal year 2016 for the combined business, excluding the impact of currency headwinds. The company expects sales to dip by $1.2bn-$1.4bn, or 30-40 cents per share for the year assuming that foreign-exchange rates would remain similar to current levels.

Final Thoughts

Medtronic Plc currently competes with Johnson & Johnson (JNJ, Financial) and St. Jude Medical Inc. (STJ, Financial) in the medical devices arena in the US. Although the company’s price to earnings ratio (P/E) is better than the industry average, Medtronic will have to fare better in the upcoming years to rival the better performing JNJ and STJ shares.

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Medtronic Plc expects the newly formed combined entity to win a greater market share and generate higher profits in the near term. While the company’s share price has consistently grown over the last year to touch a 52-week high of $77.83 a share at the time of announcing the Q3 results, Medtronic has also logged a balanced growth across all segments. Although currency headwinds and margin pressures are expected to endure in the upcoming quarter, experts foresee robust growth for the company in the upcoming years and have pegged the Medtronic stock as a ‘buy’ for the long term.