We reiterate our Neutral recommendation on
St. Jude Medical
). St. Jude reported third quarter 2012 adjusted earnings per
share of 83 cents (up 6.4% year-over-year). The results also beat
the Zacks Consensus Estimate by 2 cents. However, profits dropped
22.5% to $176 million (or 56 cents a share) on account of weak
revenue generation and a contraction in operating margin.
Reported net revenues of $1,326 million were down 4% year over
year and also missed the Zacks Consensus Estimate of $1,342
million. Net sales grew less than 1% on constant currency basis.
All segments reported disappointing results, especially Cardiac
Rhythm Management (CRM) and Cardiovascular units, except the
Atrial Fibrillation (AF) business.
With a market-cap of $11.70 billion, St. Jude is a leading
provider of medical devices with a number of growth drivers,
which are expected to boost sales over the long term. The company
is well positioned to savor incremental opportunities on the back
of a strong product pipeline.
The AF market has become one of the best growth opportunities in
the MedTech space. With a market size of roughly $2.4 billion,
St. Jude is growing at a double-digit rate in this market, driven
by higher sales of ablation catheters, capital equipment and
disposable products. Moreover, the company identified seven major
growth drivers in the CV business alone, which are anticipated to
boost sales to over $2 billion annually after their maturity.
St. Jude's 2012 business realignment plan is focused on improving
the company's operating margin in the face of a tough
macroeconomic environment. The company plans to utilize this
savings to fund its portfolio of new growth drivers and maintain
its industry leading position. This measure was necessary to
hedge against the upcoming MedTech tax from 2013 and generate
double-digit bottom-line growth.
While a host of new growth drivers (including new products, cost
saving measures and share buyback programs) are expected to boost
results in 2013 and beyond, we remain cautious about increased
competition, a weakening Euro, the soft CRM business and the
overall tough macroeconomic conditions.
The company's downward revision of its core CRM sales is a
significant cause of concern. The prevailing macroeconomic
factors, realignment expenses, pricing pressure, austerity
measures and the impact of the health care reforms are weighing
down on the CRM market moving ahead. Further, the implantable
cardioverter defibrillator systems (ICD) business continues to be
plagued by reliability issues concerning the high-voltage lead
A choppy CRM space continues to overhang on St. Jude and its
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