Medtronic PLC (MDT) Down -2.1% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Medtronic PLC MDT. Shares have lost about 2.1% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is MDT due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Medtronic reported third-quarter fiscal 2018 adjusted earnings per share (EPS) of $1.17, beating the Zacks Consensus Estimate by a penny. Earnings rose 4.5% year over year.

Adjustments in the quarter primarily included the impact of restructuring charges, intangible asset amortization, divestiture-related items and acquisition-related items. After adjusting for unfavorable foreign exchange impact of a penny, adjusted EPS was $1.18.

Without these adjustments, the company’s reported a net loss of $1.03 per share, compared to 59 cents in the previous year. This included a $2.2-billion net tax expense related to the U.S. tax reform.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.37 billion, up 7% on a constant exchange rate or CER basis (up 1.2% on a reported basis). The top line surpassed the Zacks Consensus Estimate of $7.20 billion. Foreign currency fluctuation favorably impacted Medtronic’s third-quarter revenues by $177 million.

In the quarter under review, U.S. sales (53.1% of total revenues) fell 4.9% year over year (up 6% at CER) to $3.91 billion. Non-U.S. developed market revenues totaled $2.36 billion (32% of total revenues), reflecting a 5% increase at CER (up 7.8% as reported). Emerging market revenues (14.9% of total revenues) amounted to $1.10 billion, up 12% at CER (up 11.8% as reported).

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 now includes the Surgical Innovations (SI) and the Respiratory, Gastrointestinal & Renal (RGR) divisions after the divestiture of Patient Care, Deep Vein Thrombosis (Compression), and Nutritional Insufficiency (Enteral Feeding) businesses. RTG comprises 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.

CVG revenues improved 7% at CER (up 10% as reported) to $2.80 billion, driven by strong, balanced growth across all three divisions.

CRHF sales totaled $1.46 billion, up 4% year over year at CER (up 6% as reported). This came on the back of growth in Arrhythmia Management led by high-teens growth in atrial fibrillation Solutions at CER, amplified penetration of the Micra transcatheter pacing system, and strong uptake of the TYRX absorbable antibacterial envelope. This apart, strong demand for the company's suite of quadripolar cardiac resynchronization therapy-pacemakers (CRT-P) along with growth in Mechanical Circulatory Support drove Heart Failure division revenues.

CSH revenues were up 14% at CER (18% as reported) to $886 million on the back of low-30s constant currency growth in transcatheter aortic valves as a result of strong customer uptake of the CoreValve Evolut PRO platform and expanded FDA approval to include patients at intermediate risk. Moreover, the continued uptake of the Resolute Onyx drug-eluting stent in the United States and Japan revived the Coronary business.

APV revenues registered 5% growth at CER (up 7% as reported) to $457 million, driven by continued adoption of the Valiant Captiviathoracic stent graft systems. Peripheral was driven by double-digit growth in percutaneous transluminal angioplasty and drug-coated balloons. Moreover, solid contributions from VenaSeal closure system drove high-single digit growth in endoVenous.

In MITG, worldwide sales reached $2.04 billion, marking a 6% year-over-year increase at CER (down 16% on a reported basis) on high-single digit growth in SI, and a low-single digit growth in RGR, both at CER.

In RTG, worldwide revenues of $1.94 billion were up 5% year over year at CER (up 7% as reported) on low double-digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies and high-single digit growth in Pain Therapies, at CER. However, revenues from the Spine business remained flat at CER on a year-over-year basis.

Moreover, revenues at the Diabetes group increased 13% at CER (17% as reported) to $584 million.

Margins

Gross margin in the reported quarter expanded 140 basis points (bps) to 70.3% on a 3.3% rise in gross profit to $5.18 billion. Adjusted operating margin expanded 10 bps year over year to 28.9% owing to a 5.3% rise in research and development expenses (to $558 million) along with a 4.6% uptick in selling, general and administrative expenses (to $2.49 billion). Other expenses in the reported quarter totaled $140 million as compared with $46 million in the year-ago quarter.

Guidance

Medtronic reiterated its fiscal 2018 constant-currency revenue and EPS guidance. The company maintains full-year revenue growth projection at the range of 4-5% at CER. However, the company revised its foreign currency fluctuation estimation, which is now projected to have a positive $480-$500 million impact on fiscal results compared with $275-$375 million estimated earlier. The Zacks Consensus Estimate for 2018 revenues remains at $29.50 billion.

Fiscal 2018 adjusted earnings per share growth is still expected in the range of 9-10% at CER. Currency translation is likely to have an adverse impact of 4 cents compared with the earlier expectation of a negative effect of 2 cents. The Zacks Consensus Estimate for fiscal 2018 earnings is pegged at $4.76.

For the fourth quarter of fiscal 2018, Medtronic expects currency translation to have a favorable impact of $300-$320 million on revenues. Currency translation is expected affect fourth-quarter earnings per share by 2 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been ten revisions lower for the current quarter.

Medtronic PLC Price and Consensus

 

Medtronic PLC Price and Consensus | Medtronic PLC Quote

VGM Scores

At this time, MDT has a subpar Growth Score of D, though it is lagging a bit on the momentum front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, MDT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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