Why Is Medtronic (MDT) Up 2.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Medtronic (MDT). Shares have added about 2.1% in that time frame, underperforming the S&P 500.

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

Solid Overall Growth Drives Medtronic's Q1 Earnings

Medtronic reported first-quarter fiscal 2020 adjusted earnings per share (EPS) of $1.26, beating the Zacks Consensus Estimate by 6.8%. Adjusted earnings also rose 7.7% year over year.

After adjusting the foreign exchange headwind of 2 cents, adjusted EPS increased 9% year over year.
Without the adjustments, net earnings were 64 cents per share, reflecting an 18.9% decline from the year-ago quarter.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.49 billion, up 3.5% at constant exchange rate or CER (up 1.5% on a reported basis). The top line also exceeded the Zacks Consensus Estimate by 1.1%. Revenues at CER in the quarter include adjustments for a $146-million negative impact from foreign currency.

In the quarter under review, U.S. sales (52% of total revenues) inched up 1.4% year over year on a reported basis to $3.92 billion. While non-U.S. developed market revenues summed $2.38 billion (32% of total revenues), depicting a 1.2% dip reportedly (up 2.6% at CER). Again the emerging market revenues (16% of total revenues) amounted to $1.19 billion, up 7.5% reportedly (up 12.5% at CER).

Segment Details

The company currently generates revenues from four major groups, namely Cardiac and 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 the Surgical Innovations (SI) and the Respiratory, Gastrointestinal & Renal (RGR) divisions. RTG consists of 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.

In the fiscal first quarter, CVG revenues improved 1.4% at CER (down 0.7% as reported) to $2.79 billion, driven by mid-single digit growth in CSH and low-single-digit growth in APV, offset by a low-single digit decline in CRHF, all at CER.

CRHF sales totaled $1.38 billion, down 1.2% year over year at CER (down 3.1% as reported). The mid-single digits’ growth in Arrhythmia Management was countered by a low-double digit fall in Heart Failure.

CSH revenues were up 5.2% at CER (up 2.6% as reported) to $941 million, driven by mid-teens’ growth in transcatheter aortic valves. The company reported low-single digits’ year-over-year deterioration in drug-eluting stents sales in the quarter.

APV revenues registered 1.7% growth at CER (down 0.2% as reported) to $467 million, boosted by high-single-digits’ growth in Venous and mid-single digits’ rise in Aortic, both partially offset by high-single digits’ decline in Peripheral.

In MITG, worldwide sales totaled $2.1 billion, marking a 4.8% year-over-year increase at CER (up 2.3% on a reported basis), banking on mid-single digit growth in both SI (Surgical Innovations) and RGR (Respiratory, Gastrointestinal & Renal).

In RTG, worldwide revenues of $2.01 billion were up 4.6% year over year at CER (up 3.2% as reported) on low-double digit growth in Brain Therapies, mid-single digit growth in Specialty Therapies and low-single digit growth in the Spine business, offset by mid-single digit declines in Pain Therapies.

Moreover, revenues at the Diabetes group increased 5.4% at CER (up 3.5% as reported) to $592 million.

Margins

Gross margin in the reported quarter contracted 173 basis points (bps) to 68.4% on a 7.4% rise in the cost of revenues to $2.37 billion. Adjusted operating margin expanded 193 bps year over year to 26.7%. Meanwhile, there was a 2% slip in selling, general and administrative expenses (to $2.54 billion) while research and development expenses edged up 0.3% (to $587 million). Other income in the quarter under discussion totaled $22 million against the $151-million expense a year ago.

Fiscal 2020 Guidance Updated

The company has reiterated its fiscal 2020 revenue outlook. For the full year, organic revenue growth is expected to be 4%. Adverse currency fluctuation is projected to affect the top line by 0.8-1.2%. The current Zacks Consensus Estimate for revenues is pegged at $31.44 billion.

Fiscal 2020 adjusted EPS view has been raised to the range of $5.54-$5.60 (earlier range was $5.44-$5.50). Currency fluctuation is expected to have a 10-cent adverse impact on the full-year adjusted EPS. The Zacks Consensus Estimate of $5.47 for the metric is below the guided range.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Medtronic has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Medtronic has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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