Medtronic Beats Earnings, Lowers Guidance

Medtronic (MDT) reported fiscal Q2 earnings (quarter ending in October) this morning of 82 cents per share. Wall Street’s consensus was for 81 cents per share. I had seen earlier reports that the consensus was for 82 cents; perhaps it came down some. If so, we have an earnings beat.

I had said in last week’s CWS Market Review (what, you still haven’t signed up? It’s FREE) that I thought Medtronic could lower their full-year guidance. Well, that’s exactly what they did. To recap, in August they lowered their 2011 EPS guidance to a range of $3.40 to $3.48 from $3.45 to $3.55. Today, they brought it down to $3.38 to $3.44.

Let’s see how that stacks up: For the first half of their fiscal year, MDT has earned $1.61 per share. That means they need to earn between $1.77 and $1.83 per share for the second half to hit their guidance. Last year they made $1.67 per share in the back half, so given the recent growth rate, the new forecast is very reasonable.

Sales of defibrillators and pacemakers fell 2 percent to $1.25 billion for the quarter, while sales of stents, heart valves and other heart implants grew 6 percent to $738 million, helped by sales in China, Latin America and other emerging markets.

Sales of restorative therapies, which include spinal, diabetes and other products, rose 2 percent to $1.81 billion. Within that group, spinal sales fell 1 percent to $850 million, but that was well ahead of analyst estimates for $825 million.

Medtronic spent nearly $4 billion to acquire spinal implant maker Kyphon in 2007 and sales have continued to lag behind Wall Street expectations.

“Our pipeline, which we’ve been talking about for some time, is starting to show results and is going to allow us to drive market growth and ultimately put us in position to gain share,” said Chief Executive Bill Hawkins.

Spinal procedures tend to be expensive and highly invasive and the rate of procedures has not kept pace with company estimates.

Despite improved performance, the company still scaled back its scaled back its overall growth expectations for the device market to 2-3 percent from 2-4 percent for the second half of the year.

I haven’t been thrilled with Medtonic’s earnings recently, and this quarter is no exception. Put it this way: the CFO said, “The fact that it’s not getting any worse out there gives us the excitement that we are in the right markets and they will eventually return to their historical growth.”

Still, the numbers are very favorable. Medtronic should make $3.40 per share this fiscal year. The stock is currently going for slightly more than 10 times that. On top of that, the shares currently offer a nice 22.5-cent quarterly dividend (2.6% annualized). Medtronic is an excellent buy below $34 per share.

Posted by on November 23rd, 2010 at 1:30 pm


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