Zacks_Analysts' Blog : Earnings Scorecard: St. Jude - Analyst Blog

Medical devices giant St. Jude Medical (STJ) continued its positive earnings surprise streak in first-quarter fiscal 2011 as its adjusted earnings per share of 80 cents beat the Zacks Consensus Estimates of 78 cents and exceeded the year-ago earnings of 75 cents.

Highlights from the Quarter

Net earnings, as reported, dipped 2.2% year over year to $233 million (or 71 cents a share), hit by charges associated with the company’s acquisition of cardiac devices maker AGA Medical.

Revenues climbed 9% year over year to $1,376 million, boosted by double-digit growth across the company’s Cardiovascular, Atrial Fibrillation and Neuromodulation franchises. Sales were in line with the Zacks Consensus Estimate.

Revenues from the company’s core Cardiac Rhythm Management (“CRM”) division edged up 1% year over year to $762 million as higher ICD sales were partly marred by a weak Pacemaker business. St. Jude witnessed double-digit growth across its Atrial Fibrillation, Neuromodulation and Cardiovascular businesses. The company beefed up its earnings forecast for fiscal 2011.

We have discussed the quarterly results at length here: St. Jude EPS Beats, Raises View

Agreement – Estimate Revisions

St. Jude’s first quarter results have inspired bullishness among the analysts. Estimates for fiscal 2011 are on the upswing with 21 analysts (out of total 26) having hiked their forecasts over the last 30 days (with a couple of positive revisions over the last week) while none moved in the opposite direction.

A somewhat similar trend applies to the forecasts for fiscal 2012 with 17 analysts (out of 28) raising their estimates over the last 30 days with only 2 making negative revisions. There were 2 positive revisions over the past 7 days with no reverse movements.   

The optimism among the analysts reflects the company’s upward guidance revision and encouraging prospects across its key business lines (with major product launches around the corner) and emerging market opportunities, which are expected to foster healthier growth starting second-half 2011.   

Magnitude – Consensus Estimate Trend

A plethora of positive revisions coupled with a sheer directional consensus has led to an increase in the magnitude of revisions for both fiscal 2011 and 2012 over the past month. Estimates for 2011 and 2012 both have gone up by 3 cents over the last 30 days, but have remained static over the last week.   

Neutral on St. Jude

St. Jude is a leading medical devices maker producing consistent revenue growth over the past decade. The company is poised for incremental opportunities in CRM on the back of strong product momentum.

St. Jude’s Fortify and Unify lines of ICDs are already gaining notable traction. Moreover, launch of several products (including the quadripolar CRT systems) should boost the company’s CRM market share in 2011.

St. Jude recently won the European approval for its Accent MRI pacemaker, designed for safe usage with Magnetic Resonance Imaging (“MRI”) equipment. Also, the recent approval of the ShockGuard technology, designed for use with the Fortify and Unify systems to reduce inappropriate shocks to patients with ICDs, represents an incremental positive for the company.

The company’s strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart-failure management. The CardioMEMS congestive heart failure monitor, scheduled for full launch in the U.S. in 2012, will help St. Jude gain CRM share.

The collaboration with leading ultrasound systems provider ZONARE Medical Systems has strengthened St. Jude’s foothold in the intracardiac echocardiography (“ICE”) market, which is growing roughly 25%-30% annually.

Moreover, the recent U.S. approval of two new irrigated ablation catheters (Safire BLU and Therapy Cool Path) for treating cardiac arrhythmias should help St. Jude sustain the healthy growth in Atrial Fibrillation through 2011.

Growth in Neuromodulation will be fostered by the adoption of the company’s deep brain stimulation (DBS) systems and sustained uptake of the Eon Mini system. The company is expected to receive the European approval for the DBS system in the migraine indication and U.S. approval in Parkinson’s disease in 2011, representing promising prospects.

The acquisition of AGA Medical has considerably strengthened St. Jude’s Cardiovascular business, providing the opportunity to expand into fast-growing new therapy areas. Moreover, St. Jude has entered the $450 million market for pericardial stented tissue valves with the approval of its Trifecta line of valves.

Trifecta, which was launched in Europe in fourth-quarter 2010 and was recently approved in the U.S., represents a major new driver for the company’s Cardiovascular franchise. St. Jude’s tissue valve business in Europe is growing by more than 30% and the company expects similar growth in the U.S.

However, St. Jude has challenges ahead. The company and its peers Medtronic (MDT) and Boston Scientific (BSX) are in a fierce battle to grab market share in the soft CRM market. Competition has intensified with the launch of the Protecta line of defibrillators by Medtronic in March 2011.

Tough competition between ShockGuard and Protecta should aggravate a price war. Moreover, Boston Scientific is expected to launch new ICD devices (with shock-reducing capabilities) by mid-2011, thereby adding  fuel to the fire.   

St. Jude continues to expect the worldwide CRM market to remain challenged and project the market to grow at a low single-digit rate in 2011. Moreover, the impact of the earthquake and Tsunami in Japan is expected to weigh on the company’s CRM results.

While we are impressed with St. Jude’s solid fundamentals, strong product mix, healthy growth trajectory and operating leverage, we remain wary of competition-driven pricing pressure and a soft CRM market, which may dent future operating results. Our Neutral recommendation for the stock is backed by a Zacks #3 Rank (Hold).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.