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Medtronic (MDT) Beats on Q3 Earnings, Retains Sales View

Medtronic plcMDT reported financial results for third-quarter fiscal 2017. Adjusted earnings per share (EPS) in the reported quarter came in at $1.12, a penny ahead of the Zacks Consensus Estimate and up 5.7% year over year.

Adjustments in the quarter primarily included certain impact of restructuring charges, intangible asset amortization, acquisition-related items and litigation charges. After adjusting unfavorable foreign exchange impact of 5 cents, adjusted EPS came in at $1.17, up 10% year over year.

Without these adjustments, the company reported net income of 59 cents per share, down 23% year over year.

Total Revenue

Worldwide revenues in the reported quarter grossed $7.283 billion, up 6% on a constant exchange rate or CER basis (up 5% as reported). The top line remained ahead of the Zacks Consensus Estimate of $7.23 billion. Foreign currency fluctuation negatively affected Medtronic's fiscal third-quarter revenues by $40 million.

In the quarter under review, U.S. sales (56% of total sales) increased 4% year over year to $4.106 billion. Non-U.S. developed market revenues totaled $2.193 billion (30% of total sales), a 7% increase at CER (up 6% as reported). Emerging markets experienced 11% revenue growth (up 9% as reported) to $984 million at CER.

Medtronic PLC Price, Consensus and EPS Surprise

Medtronic PLC Price, Consensus and EPS Surprise | Medtronic PLC Quote

Segment Details

The company currently generates revenues from four major groups, viz. Cardiac & Vascular Group (CVG), Minimally Invasive Therapies Group (MITG), Restorative Therapies Group (RTG) and Diabetes Group.

CVG comprises Cardiac Rhythm & Heart Failure (CRHF), Coronary & Structural Heart (CSH), and Aortic & Peripheral Vascular divisions (APV). MITG includes both the Surgical Solutions division and the Patient Monitoring & Recovery (PMR) division. RTG includes the Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while the Diabetes Group incorporates the Intensive Insulin Management (IIM), Non-Intensive Diabetes Therapies (NDT), and Diabetes Service & Solutions (DSS) divisions.

Revenues from CVG improved 6% at CER (or up 5% as reported) to $2.584 billion, driven by high-single digit growth in CRHF and APV, and low-single digit growth in CSH at CER.

CRHF sales were $1.37 billion with 8% year-over-year growth at CER (up 7% as reported). This came on the back of growth in mid-single digit in Arrhythmia Management, high-teens in Heart Failure and low-double digits in Services & Solutions, all at CER.

CSH revenues were up 3% at CER (up 2% as reported) to $751 million on the back of low-double digit constant currency growth in Structural Heart, which was partially offset by mid-single digit constant currency decline in Coronary on sluggish drug-eluting stents performances in the U.S. and Japan. The recent U.S. launch of CoreValve Evolut R 34 mm transcatheter aortic heart valve drove Structural Heart growth.

APV revenues registered 6% growth at CER (same as reported) to $426 million, driven by high-single digit growth in Peripheral Vascular and mid-single digit growth in Aortic.

In MITG, worldwide sales reached $2.417 billion, marking a 6% year-over-year increase at CER on high-single digit growth in Surgical Solutions and mid-single digit growth in PMR at CER.

In RTG, worldwide revenues of $1.817 billion were up 4% year over year at CER (same as reported) owing to high-single digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies, and low-single digit growth in Spine, mitigating a decline in Pain Therapies. Revenues from the Diabetes group went up 7% at CER (up 6% as reported) to $501 million.

Margins

Gross margin during the reported quarter contracted 26 basis points (bps) to 68.9% despite a 4.6% increase in gross profit to $5.02 billion. Adjusted operating margin expanded 46 bps year over year to 28.2%, despite a 3.1% rise in selling, general and administrative expenses (to $2.39 billion) and a 411.1% surge in Other income to $46 million. There was a 2.9% decline in research and development expenses (to $530 million) in the reported quarter.

Guidance

Medtronic has updated its fiscal 2017 adjusted EPS guidance. Management anticipates adjusted diluted EPS in the range of $4.55−$4.60. This takes into account the estimated 8−10 cents impact from the extra week in the first quarter in fiscal 2017, the estimated negative impact from foreign currency exchange of approximately 20 cents, and assuming current exchange rates will remain unchanged for the rest of the year. The Zacks Consensus Estimate is pegged at $4.56 per share, close to the lower-end of the guided range.

However, the company continues to expect revenue growth for the fiscal to be within the mid-single digit range on a constant currency, constant week basis. This guidance is also in line with the company's long-term, mid-single digit constant currency revenue growth expectation. The Zacks Consensus Estimate for revenues remains at $29.58 billion for fiscal 2017. For the remainder of the fiscal year, foreign exchange rate is expected to negatively affect revenues by $40 million.

For the fourth quarter of fiscal 2017, revenue growth is expected to be in the lower half of the mid-single digit range at CER. The impact from foreign exchange is expected to be unfavorable to the tune of $20 million on the quarter's revenues. The Zacks Consensus Estimate for the next quarter stands at $7.85 billion.

Our Take

Medtronic's posted better-than-expected fiscal third-quarter results with both earnings and revenues ahead of the Zacks Consensus Estimate. While the company demonstrated improved segmental performances at CER basis, escalating costs and expenses weighed on margins. Also, unfavorable foreign exchange rate continues to remain a major headwind and the fiscal guidance fails to indicate any chances of respite.

On a positive note, all four major business groups contributed to solid top-line growth at CER, which according to the company, highlighted sustainability across groups and regions, in addition to displaying successful integration and achievement of synergy targets. We are also encouraged by the solid growth trend successfully continuing in the U.S. as well as the healthy global acceptance of its advanced therapies. Apart from product innovation, the company is currently focusing on geographical diversification of its businesses.

Zacks Rank & Key Picks

Medtronic currently carries a Zacks Rank #4 (Sell). Better-ranked medical stocks include Glaukos Corporation GKOS , Cardiovascular Systems CSII and Neogen Corp. NEOG . Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Glaukos gained over 100% in the last one year compared with the S&P 500's gain of 22.4%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year compared with the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 34.6% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth rate of 16.7% for the next five years compared with the industry average of 15.2%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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