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Medtronic (MDT) to Report Q3 Earnings: What's in the Cards?

Ireland-based medical device major Medtronic plc MDT is slated to report its third-quarter fiscal 2016 earnings on Mar 1, before the opening bell.

Last quarter, the company had delivered a positive earnings surprise of 3%. Impressively enough, Medtronic’s earnings have outpaced the Zacks Consensus Estimate in all of the past four quarters, with an average beat of 3.15%. Let’s see how things are shaping up prior to this announcement.  

Factors at Play

Despite the fact that Medtronic continues to be plagued by a robust foreign exchange headwind, the company’s strong operations render optimism for a brighter fiscal 2016. The company, on its fiscal second quarter earnings call, had noted that, revenue growth will remain at the upper half of its earlier predicted mid-single-digit guidance range at CER during the back half of fiscal 2016.

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This was based on the company’s assumption that during this period, its Minimally Invasive Therapies Group (MITG) will grow in low-to-mid single digits, Restorative Therapies Group (RTG) will demonstrate mid-single-digit growth, Cardiac and Vascular Group (CVG) will grow in mid-to-high single digits and Diabetes will grow in the high-single to low-double-digit range.

We are optimistic on this balanced growth forecast across all the business groups of Medtronic, and expect the same to be reflected from the third quarter itself. However, the company’s prediction on the impact of currency movement continues to remain a matter of concern.

According to Medtronic, negative impact from foreign currency translation in the second half is expected to remain in the range of $425 million to $725 million, based on current exchange rates. This translates into negative impact from foreign currency of $1.45 to $1.65 billion for the entire fiscal. We note that, this marks an increase from the earlier estimation of $1.3–$1.5 billion worth of negative foreign currency impact.

Over the past few quarters, Medtronic’s core Spine revenues have been a major overhang, persistently underperforming the broader market growth. However, with the recent realignment of RTG commercial sales management, the implementation of the surgical synergy programs as well as the numerous recent and upcoming product launches, Medtronic strongly expects a change of trend in the U.S. core Spine performance down the line. 

On the other hand, as far as the Covidien acquisition is concerned, Medtronic is making excellent progress with the integration of Covidien into its business.  The company has already started to gain from its first and highest priority ‘preserve’, which is evident from the continued revenue growth across all business groups and geographies. Under priority ‘optimize’, Medtronic is on track toward achieving the expected minimum $850 million in cost synergies by the end of fiscal 2018.

Under the third priority ‘accelerate’, which focuses on numerous revenue synergy opportunities, the company is successfully working on leveraging the legacy Covidien's peripheral vascular sales force to drive sales of drug-coated balloons. Medtronic is also leveraging Covidien's Neurovascular Division to enhance its Neuroscience strategy in RTG. Under the ‘transform’ priority, the consolidated company is working on delivering higher value in healthcare, aligning its solutions to the emerging value-based payment markets and partnering with new stakeholders to lead and succeed in the transforming healthcare space.

Earnings Whispers

Our proven model does not conclusively show that Medtronic is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP:  Medtronic has an earnings ESP of 0.00%. That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.06.

Zacks Rank: Medtronic has a Zacks Rank #3 which increases the predictive power of ESP. However, a positive ESP is necessary to confidently predict an earnings beat.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter:

Achillion Pharmaceuticals, Inc. ACHN, earnings ESP of +44.44% and a Zacks Rank #2.

The Cooper Companies Inc. COO, earnings ESP of +2.53% and a Zacks Rank #2.

MacroGenics, Inc. MGNX, earnings ESP of +1.75% and a Zacks Rank #3.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


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MEDTRONIC (MDT): Free Stock Analysis Report
 
MACROGENICS INC (MGNX): Free Stock Analysis Report
 
ACHILLION PHARM (ACHN): Free Stock Analysis Report
 
COOPER COS (COO): Free Stock Analysis Report
 
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