Can Medtronic (MDT) Surprise this Earnings Season? - Analyst Blog

We expect medical device major Medtronic, Inc. MDT to beat expectations when it reports its fourth-quarter and full-year fiscal 2014 financial results on May 20, 2014.

Why a Likely Positive Surprise?

Our proven model shows that Medtronic is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Expected Surprise Prediction or Earnings ESP represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate. Medtronic has a Zacks ESP of +0.89%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank: Medtronic carries a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.  

The combination of Medtronic's Zacks Rank #3 and +0.89% ESP makes us confident of a possible earnings beat on May 20. It is worth noting in this context that Medtronic has delivered positive surprises in 2 of its last 4 quarters, with an average beat of 3.96%.

What is Driving the Better-than-Expected Earnings?

Medtronic posted a mixed third quarter fiscal 2014 with in-line EPS and a revenue beat., While adjusted earnings of 91 cents per share were down 2% year over year and in line with the Zacks Consensus Estimate, revenues grew 4% (at constant currency basis or CER) to $4.163 billion beating the Zacks Consensus Estimate of $4.155 billion.

It is noteworthy to mention that all eight of Medtronic's primary businesses were stable or on an uptrend in the last reported quarter, with a consistent pattern of increasing stabilization in certain businesses.

At present, management is focused on enhancing operational excellence to deliver consistent and reliable results. Medtronic is quite confident that its three primary strategies viz. therapy innovation, globalization and economic value will strengthen, diversify and expand its market leading competitive position in the future.

Earlier this month, Medtronic presented clinical trial data afresh at Heart Rhythm 2014, demonstrating a new set of advanced pacemakers that can significantly delay the progression of persistent atrial fibrillation AF in patients with bradycardia. Patients using these pacemakers revealed a reduced rate of AF-related hospitalizations and emergency room visits. Additionally, this device has the potential to save approximately $1,218 per patient in healthcare costs over a 10-year span. This device in addition of providing patient benefits, can positively impact healthcare cost and thus can be expected to be preferred by both physicians and patients in the long term.  

Besides, hospitals are investing in Medtronic's capital equipment for spine surgery as they witness clear value from improved surgical precision and more efficient procedures. This is resulting in solid growth of capital equipment sales in the company's surgical technologies business as well as increased spinal implant growth. In fact, in accounts that have adopted Medtronic's surgical synergy program, core spine revenue growth is significantly higher.

Moreover, with globalization on the rise, Medtronic is targeting the multibillion dollar annual opportunity in emerging markets, particularly in densely populated countries like China and India.

Other Stocks

Here are some other healthcare stocks that we had speculated as capable of delivering an earnings beat in their recently reported quarterly results:

Align Technology Inc. ALGN had an Earnings ESP of +13.89% for the first quarter of 2014 and a Zacks Rank #1 (Strong Buy). The company eventually delivered a positive surprise of 8.33% in the last reported quarter.

Affymetrix Inc. AFFX had an earnings ESP of +50.00% for the first quarter of 2014 and a Zacks Rank # 2 (Buy). The company delivered a positive surprise of 50.0% in the quarter.

Cardinal Health, Inc. CAH had an earnings ESP of +1.00% for the third quarter of fiscal 2014 and a Zacks Rank #2 (Buy). The company eventually delivered a positive surprise of 1.0% in the quarter.

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