Earnings Preview: St. Jude - Analyst Blog

Medical devices giant St. Jude Medical (STJ) is slated to report its fourth quarter and fiscal 2010 results before the market opens on Wednesday, January 26. The Minnesota-based company, on January 12, reported healthy preliminary sales for the fourth quarter. St. Jude expects to post revenues of $1,350 million for the quarter, up 12% year over year, ahead of the current Zacks Consensus Estimate of $1,323 million.

Per the preliminary data, revenues from the Cardiac Rhythm Management (“CRM”) division rose 9% to $762 million owing to strong ICD sales, which climbed 16% to $458 million. Pacemaker sales were relatively stable at $304 million. Atrial Fibrillation sales surged 13% to $193 while neuromodulation revenues jumped 15% to $108 million. Revenues from the Cardiovascular business cruised 20% to $287 million, boosted by the acquisition of heart devices maker AGA Medical.

Based on the impressive top-line performance, St. Jude now expects adjusted earnings for the fourth quarter to be close to the upper end of its guidance range of 72 cents to 74 cents. The current Zacks Consensus Estimate for the quarter is 74 cents, representing an estimated 15.06% annualized growth.

With respect to earnings surprises, St. Jude made a clean sweep posting four positive earnings surprises in the preceding four quarters. The company has produced an average positive earnings surprise of 6.91% over the last four quarters, implying that it has beat the Zacks Consensus Estimate by that measure. Based on this impressive trend, we expect the company to outperform in the fourth quarter.

Third-Quarter Highlights

St. Jude produced a mixed bag in third quarter 2010 beating earnings expectations, but missing on the revenue front. Adjusted earnings of 72 cents per share surpassed the Zacks Consensus Estimate of 68 cents while net income spiked roughly 25%, buoyed by revenue growth across the board.

Revenues leapt 7% year over year to $1,240 million, but trailed the Zacks Consensus Estimate of $1,247 million. Growth was led by healthy ICD sales, which jumped 13% to $439 million. However, the encouraging ICD growth, by some measure, was marred by yet another sluggish performance by the pacemaker business.

St. Jude's Atrial Fibrillation and Neuromodulation franchises remained on the growth track with revenues rising 8% and 11%, respectively. Moreover, effective cost-management fuelled operating margin expansion.

Estimate Revisions Trend

Agreement

Estimates for the fourth quarter have barely moved in the past week with just 1 out of 22 analysts having lowered his/her forecast while none raising their estimates. However, estimates over the past month reflect a strong bullish sentiment with 9 analysts having lifted their estimates accompanied by just 1 negative revision, manifesting a sheer directional agreement.

Estimates for fiscal 2010 reflect lack of activity over the last 7 days. However, 9 analysts (out of 27) have raised their forecasts over the past month with 2 reverse movements. The optimism among the analysts reflects St. Jude's strong preliminary sales and improved earnings visibility as reflected in the company's recent guidance.

Magnitude

Given the lack of estimate revisions, the magnitude of revisions for the fourth quarter has been static over the last 7 days. However, the positive estimate revisions coupled with a directional consensus have led to an increase in the estimates for the quarter by 1 cent over the past 30 days.  

Estimates for fiscal 2010 have remained unchanged over the last week and month. The current Zacks Consensus Estimate for fiscal 2010 is $2.99, reflecting an estimated year-over-year growth of 23.23%.   

Our Take on St. Jude

We remain intrigued by St. Jude's ability to deliver consistent revenue and earnings growth and believe that future growth should be supported by numerous product introductions across the U.S. and Europe. St. Jude's new Fortify and Unify lines of ICDs are already gaining notable traction. The company currently holds a 25% share in the global ICD market and is poised to expand its position through increased penetration with these new devices. 

Neuromodulation represents another lucrative platform for St. Jude, which offers spinal cord stimulators in this nascent but fast-growing market. Growth in this segment will be fostered by the adoption of the company's deep brain stimulation (DBS) systems and sustained uptake of the Eon Mini SCS system.

Moreover, St. Jude is well positioned to savor incremental opportunities in its Cardiovascular business on the back of its acquisition of medical technology firm LightLab Imaging, which has enabled it to enter the fast-growing intravascular imaging market. Also, St. Jude's $1.3 billion acquisition of AGA Medical Holdings in November 2010 has considerably strengthened its Atrial fibrillation and Cardiovascular franchises.

The AGA Medical acquisition provides St. Jude with the opportunity to expand into fast-growing new therapy areas beyond its legacy ICD and pacemaker markets. The integration of the complementary product lines will make the combined entity a leading player in the structural heart market.

However, St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX) are increasingly in a tug-of-war to grab market share in a soft CRM market. Competition is set to intensify as Medtronic introduces its new ICD and pacemaker devices, which are currently awaiting final regulatory approval. 

While St. Jude is poised to grow its CRM market share (especially in ICDs), it is challenged by competition-driven pricing pressure and heightened competition in a mature pacemaker market. Moreover, we are cautious about the dilutive impact of acquisitions and any unfavorable currency exchange fluctuations on the bottom line. This is reflected in our Neutral recommendation on the stock, backed by a short-term Zacks #3 Rank (Hold).