Medtronic (MDT) Down 34.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Medtronic (NYSE:MDT). Shares have lost about 34.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Medtronic 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 catalysts.

Medtronic Q3 Earnings Top Estimates, Revenues Miss

Medtronic plc has reported third-quarter fiscal 2020 adjusted earnings per share of $1.44, beating the Zacks Consensus Estimate by 4.3%. Adjusted earnings also rose 11.6% year over year.

Without certain one-time adjustments — including restructuring, amortization expenses and certain litigation charges — GAAP earnings was $1.42, reflecting a 51.1% rise from the year-ago reported figure.

Total Revenues

Worldwide revenues in the reported quarter grossed $7.71 billion, up 2.6% on an organic basis (excluding the impacts of currency and significant acquisitions, including Titan Spine) and up 2.3% on a reported basis. The top line missed the Zacks Consensus Estimate by a marginal 1.2%. Revenues at constant exchange rate or CER improved 2.9% in the quarter, considering adjustments for a $46-million negative impact of foreign currency.

In the quarter under review, U.S. sales (52% of total revenues) inched up 0.5% year over year on a reported basis to $4.02 billion. While non-U.S. developed market revenues summed $2.38 billion (31% of total revenues), depicting a 0.4% improvement on a reported basis (up 1.5% at CER). Again, emerging market revenues (17% of total revenues) amounted to $1.32 billion, up 12% on a reported basis (up 13.6% at CER).

Segment Details

The company currently generates revenues from four major segments, 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 Surgical Innovations (“SI”), and Respiratory, Gastrointestinal & Renal (“RGR”) divisions. RTG consists of Spine, Brain Therapies, Specialty Therapies and Pain Therapies segments, while Diabetes Group incorporates Intensive Insulin Management (“IIM”), Non-Intensive Diabetes Therapies (“NDT”) and Diabetes Service & Solutions (“DSS”) divisions.

In the fiscal third quarter, CVG revenues improved 1.8% at CER (up 1.2% on a reported basis) to $2.82 billion, driven by mid-single-digit growth in CSH and low-single-digit growth in APV, offset by flat results in CRHF, all at CER.

CRHF sales totaled $1.39 billion, up 0.3% year over year at CER (down 0.3% on a reported basis). Low-single-digit growth in Arrhythmia Management was led by high-single-digit growth in Pacemakers on the consistent adoption of the company’s Micra transcatheter pacing system as well as strong growth in AF Solutions, all at CER.

CSH revenues were up 4.6% at CER (up 3.8% as reported) to $948 million, driven bymid-teens constant currency growth in TAVR. However, growth was partially offset by mid-single-digit decline year over year in drug-eluting stents sales in the quarter.

APV revenues were up 1.1% at CER (up 0.4% on a reported basis) to $478 million. Mid-single-digit growth in Aortic was offset by a high-single-digit decline in Peripheral.

In MITG, worldwide sales totaled $2.18 billion, marking a 3.2% year-over-year increase at CER (up 2.4% on a reported basis), banking on mid-single-digit growth in SI and low-single-digit growth in RGR.

In RTG, worldwide revenues of $2.11 billion were up 3.6% year over year on an organic basis (up 4.2% as reported) on high-single-digit growth in Brain Therapies, mid-single-digit growth in Specialty Therapies and flat results in Spine, offset by a low-single-digit fall in Pain Therapies.

Moreover, revenues at the Diabetes group increased 0.8% at CER (remained unchanged on a year-over-year basis) to $610 million.

Margins

Gross margin in the reported quarter contracted 108 basis points (bps) to 68.9% on 5.9% rise in the cost of revenues to $2.40 billion. Adjusted operating margin contracted 20 bps year over year to 27.9%. Meanwhile, selling, general and administrative expenses fell 0.3% to $2.58 billion, while research and development expenses moved up 2.1% to $573 million.

2020 Guidance

The company issued fiscal fourth-quarter adjusted earnings guidance of $1.62-$1.64 on organic revenue growth expectation of 4.5%. The Zacks Consensus Estimate for earnings is pegged at $1.64, while that for revenues is pegged at $8.50 billion.

Fiscal fourth-quarter revenues are expected to get adversely impacted by currency translation of 8-14 cents.

Fiscal 2020 adjusted earnings view has been raised to $5.63-$5.65 (up from $5.57-$5.63 mentioned earlier). Currency volatility is expected to have a 7-cent adverse impact on the full-year adjusted earnings compared with a negative impact of 10 cents mentioned earlier. The Zacks Consensus Estimate for the same is pegged at $5.60.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Medtronic has an average Growth Score of C, a grade with the same score on the momentum front. 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 C. 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.