Medtronic Falls on Lower Guidance

Shares of the Medtronic (MDT) are getting bashed this morning after the company lowered its earnings guidance for fiscal 2011. In my opinion, the market is overeacting but of course, that’s what markets do.
Here are the facts. Medtronic earlier said to expect EPS for FY 2011 (which ends in April 2011) to range between $3.45 and $3.55 with revenue growth ranging between 5% and 8%. Now they’ve lowered that to a range of $3.40 and $3.48, with revenue growing between 2% and 5%.
If we take the midpoints of the EPS forecasts, then the downward revision is just 1.7%. The shares, however, have been down by as much as 11.5% today. I am concerned that one lowered forecast often leads to another (and another and another….).
Still, let’s not get ahead of ourselves. Medtronic just reported pretty good earnings for their fiscal Q1 of 80 cents per share. That hit the Street’s forecast on the nose. In June, the company said to expect EPS between 79 and 81 cents which at the time was lower than the Street’s view of 84 cents per share.
With today’s earnings, MDT technically earned 76 cents per share plus there were four cents per share in charges. Revenue fell by 4% to $3.77 billion but some of that was due to currency conversion. I don’t worry so much about variables that are out of the company’s hands.
What’s causing Medtronic’s problem? CEO Bill Hawkins said, “Although we have experienced a slowdown in the markets of our largest businesses, the investments we are making in emerging markets and emerging therapies will allow us to achieve market-leading performance over the long-term.”
The AP notes:

The world’s largest medical-device company said global sales for its Cardiac and Vascular Group fell 5 percent to $2.03 billion in the quarter. Those sales actually increased 1 percent when adjusted for foreign currency and the extra week last year.
Spinal revenue dropped 9 percent to $829 million due to growing pricing pressures and weaker procedure growth, the company said.
Spinal devices make up Medtronic’s second-largest franchise. Medtronic spent nearly $4 billion to acquire spinal implant maker Kyphon in 2007, though many analysts say the unit is not living up to expectations.

If you own MDT, I know today’s news seems very bad, but the stock is still a very attractive buy. With today’s downturn, MDT is going for about nine times the lower bound of the revised forecast. Plus, the dividend yield is up to 2.9%.
Here are the sales and earnings numbers going back a few quarters:

Quarter EPS Sales in Millions
Jul-01 $0.28 $1,456
Oct-01 $0.29 $1,571
Jan-02 $0.30 $1,592
Apr-02 $0.34 $1,792
Jul-02 $0.32 $1,714
Oct-02 $0.34 $1,891
Jan-03 $0.35 $1,913
Apr-03 $0.40 $2,148
Jul-03 $0.37 $2,064
Oct-03 $0.39 $2,164
Jan-04 $0.40 $2,194
Apr-04 $0.48 $2,665
Jul-04 $0.43 $2,346
Oct-04 $0.44 $2,400
Jan-05 $0.46 $2,531
Apr-05 $0.53 $2,778
Jul-05 $0.50 $2,690
Oct-05 $0.54 $2,765
Jan-06 $0.55 $2,770
Apr-06 $0.62 $3,067
Jul-06 $0.55 $2,897
Oct-06 $0.59 $3,075
Jan-07 $0.61 $3,048
Apr-07 $0.66 $3,280
Jul-07 $0.62 $3,127
Oct-07 $0.58 $3,124
Jan-08 $0.63 $3,405
Apr-08 $0.78 $3,860
Jul-08 $0.72 $3,706
Oct-08 $0.67 $3,570
Jan-09 $0.71 $3,494
Apr-09 $0.78 $3,830
Jul-09 $0.79 $3,933
Oct-09 $0.77 $3,838
Jan-10 $0.77 $3,851
Apr-10 $0.90 $4,196
Jul-10 $0.80 $3,733

Posted by on August 24th, 2010 at 10:32 am


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