Heavy Currency Headwinds Expected in Medtronic’s Q1 Results

Medical devices manufacturer Medtronic (NYSE:MDT) is scheduled to report its fiscal 2016 first quarter results on September 3rd. ^[1] Medtronic completed the consolidation of Covidien’s acquisition last fiscal year, but significant synergies are not expected to be realized until the second half of fiscal 2016. On the other hand, the company is expected to face substantial currency headwinds in the first quarter, which could drag down its revenue growth and offset the savings from operational efficiencies. The negative impact of adverse currency movements is expected to be up to $1.5 billion in fiscal 2016, over 40% of which is expected materialize the first quarter itself. ^[2]

Medtronic has not provided revenue guidance for the first quarter, but the company is likely to achieve its broad goal of mid-single digit revenue expansion on a comparable constant currency basis. First quarter revenues are expected to benefit from an extra week, which may lift the revenue by an additional 100 to 150 basis points year on year on a comparable constant currency basis. ^[2] Synergies from the Covidien acquisition are expected to start trickling in from the back half of the current fiscal year. Consequently, the first quarter operating margin may be lower than the 28% to 29% range expected for the full year. ^[2]

Our price estimate of $70 for Medtronic is slightly lower than its current market price.

See our complete analysis for Medtronic here

New Products Expected to Provide Share Gains in CRDM

Cardiac Rhythm Disease Management (CRDM) is Medtronic’s largest division and includes defibrillators and pacemakers. The company’s steady innovations in the division drove mid-single digit revenue growth in fiscal 2015 and are expected to continue to do so in the current fiscal year. Sales of pacemakers (reported as Low Power) are being driven by the strong adoption of Reveal LINQ, which in turn is resulting in a rapid expansion in diagnostic sales. ^[2]

In April 2015, Medtronic achieved CE approval for the world’s smallest Pacemaker, the Micra Transcatheter Pacing System, which may further drive growth and market share gains in the Low Power segment in fiscal 2016. ^[3] Defibrillators (reported as High Power) sales are being driven by strong market adoption of Medtronic’s Attain Performa, CRT-D system.

Turbulence in Emerging Markets Could Impact Medium Term Prospects

Emerging markets accounted for over 7% of Medtronic’s total revenues in fiscal 2015. Revenues from emerging markets expanded at a rate of 11% year on year in the previous fiscal year, making it the fastest growing region for the company. However, with the ongoing turbulence in the emerging markets, that may be set to change over the course of the current fiscal year. The poor manufacturing data arising from China may be the first indicator of a wider slowdown, which could negatively impact spending by consumers as well as hospitals. Nevertheless, the impact of the ongoing uncertainties is unlikely to have been felt by Medtronic in the first quarter; and revenues from the region are likely to have expanded by high single digits to low double digits.

Regardless of the current economic uncertainties, Medtronic is focusing on optimizing its sales channels, strengthening customer relationships and forging new partnerships with hospitals in the region. The company is consolidating its distribution channel in India and China, where it currently has a vast number of distributors. ^[2] These measures are likely to result in operational efficiencies over the medium to long term, thereby bolstering Medtronic’s bottom line.

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1. Medtronic Investor Relations [↩]
2. Medtronic Fiscal 2015 Fourth Quarter Earnings Call Transcript, Seeking Alpha, June 2, 2015 [↩] [↩] [↩] [↩] [↩]
3. Medtronic Announces CE Mark of World’s Smallest Pacemaker, Micra Transcatheter Pacing System, Medtronic Press Release, April 14, 2015 [↩]