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Medtronic (MDT) Likely to Outshine Q4 Earnings Estimates - Analyst Blog

Medical device major Medtronic plcMDT is scheduled to report its fourth-quarter fiscal 2015 earnings before the opening bell on Jun 2. In the last reported third quarter of fiscal 2015, the company had reported better-than-expected financial results of the legacy Medtronic Inc., following the completion of the long-awaited $42.9 billion takeover of its Irish counterpart, Covidien, on Jan 26, 2015.

Medtronic's trailing four-quarter average earnings beat is pegged at 1.30%. Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Medtronic is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Medtronic's Earnings ESP is +0.90%, since the Most Accurate estimate stands at $1.12 while the Zacks Consensus Estimate is pegged lower at $1.11. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Medtronic currently has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Medtronic's Zacks Rank #3 and +0.90% ESP makes us reasonably confident of a positive earnings beat at the company.

What is Driving the Better-than-Expected Earnings?

In the fourth quarter of fiscal 2015, which will be the first quarter reporting combined Medtronic-Covidien results, Medtronic expects to achieve revenue growth in the range of 4% to 6% at CER for the combined business.

Management at Medtronic, Inc. had recognized this historical merger - probably one of the largest in the MedTech industry - as a momentous one. What has resulted from it is a unique company combining the extensive and innovative capacities of the legacy Medtronic and Covidien.

According to the Medtronic, the Covidien acquisition is fully aligned with the company's mission of alleviating pain, restoring health, and extending life for patients globally. The transaction is expected to meaningfully accelerate all three fundamental growth strategies of Medtronic - therapy innovation, globalization and economic value. We expect these benefits to be reflected in the combined company's performance from the fourth quarter itself.

The deal is also expected to bolster the long-term sustainability and consistency of the company's revenue growth expectations. Finally, the combined company should generate significant free cash flow, a substantial percentage of which can be deployed with greater flexibility.

The combined entity is likely to generate about $27 billion in total revenue, including $3.7 billion from emerging markets. The deal is expected to prove accretive to cash earnings in fiscal 2016 and significantly accretive thereafter. The transaction is also estimated to be neutral to the company's earnings by fiscal 2019 and accretive thereafter.

We expect the newly formed Medtronic plc to win significant market share on the back of the combined strength of two MedTech behemoths, and garner more profits in the near term.

However, margin pressure poses a major cause of worry. To add to that, headwinds such as unfavorable currency movement and global economic uncertainties persist. Based on current exchange rates, Medtronic expects to have a negative foreign exchange impact of $420 million to $480 million on its fourth fiscal quarter revenues.

Other Stocks to Consider

Here are some other healthcare stocks that sported the favorable combination and had been speculated by us as capable of delivering an earnings beat in the last reported quarter:

Laboratory Corp. of America Holdings LH had an earnings ESP of +0.61% for the first quarter of 2015 and a Zacks Rank #2 (Buy). The company eventually delivered a positive earnings surprise of 4.85% in the quarter.

Illumina Inc. ILMN had an earnings ESP of +1.39% for the first quarter of 2015 and a Zacks Rank #3 (Hold). The company also exceeded expectations with a positive earnings surprise of 26.39% in the quarter.

Edwards Lifesciences Corp. EW had an earnings ESP of +3.85% for the first quarter of 2015 and a Zacks Rank #3 (Hold). The company too eventually delivered an earnings beat of 7.69% in the quarter.

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MEDTRONIC (MDT): Free Stock Analysis Report

ILLUMINA INC (ILMN): Free Stock Analysis Report

EDWARDS LIFESCI (EW): Free Stock Analysis Report

LABORATORY CP (LH): Free Stock Analysis Report

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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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