We're Shrinking; It Could Be Worse

In a market that's down 4%, seeing sales fall just 3% is a good thing. I guess.

Medtronic (NYSE: MDT  ) seems to be benefiting from a recall of St. Jude Medical (NYSE: STJ  ) defibrillators. But increasing market share in a market that's shrinking isn't anything to get excited about.

Issues with defibrillators made by St. Jude, and previously by Boston Scientific (NYSE: BSX  ) , and before that by Medtronic, have to have doctors questioning whether it's really worth putting the devices into patients. Taking them out when issues crop up isn't exactly easy or safe.

The rest of Medtronic's fiscal first quarter looked fairly decent. Neuromodulation and diabetes devices helped keep revenue growth in the positive as did Johnson & Johnson's (NYSE: JNJ  ) exit from the drug-eluting stent business. Overall revenue grew 2% year over year; ignoring currency changes, revenue was up 5%. It looks like Medtronic will have to rely increasingly on its other segments for growth until the defibrillator market stabilizes.

One segment won't have any new devices to grow revenue in the immediate future. The FDA has a problem with Medtronic's implantable pumps that deliver painkillers. The company has tried to resolve the situation for nearly five years, but the FDA said its plan isn't good enough. Until the issue is resolved, the FDA won't approve any devices belonging to that class. Medtronic said that won't have any financial impact, but these things have a way of dragging out longer than expected.

Turning to the bottom line, the medical-device maker's earnings weren't too shabby with adjusted EPS up 8% year over year. Some of the higher bottom-line growth came from keeping expenses in check, but most of it was from share repurchases that lowered the denominator in the EPS calculation.

Returning cash to shareholders through buybacks and dividends -- Medtronic recently upped its dividend again -- is certainly a good thing, but investors need to keep an eye on the revenue line as well. It's easy for medical devices to fall out of favor with doctors because something better comes along or doctors decide the device is potentially doing more harm than good.

So far, Medtronic seems to be weathering the defibrillator storm well enough.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of St. Jude Medical and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy.

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