Will Obamacare Crush Medtronic's Earnings?

On Tuesday, Medtronic (NYSE: MDT  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

One of the hardest-hit industries from new taxes under Obamacare has been the medical-device business, with a new 2.3% excise tax hitting Medtronic and its device-making peers. Yet the company has taken steps to minimize the impact from Obamacare on its results. Let's take an early look at what's been happening with Medtronic over the past quarter and what we're likely to see in its quarterly report.

Stats on Medtronic

Analyst EPS Estimate

$1.03

Change From Year-Ago EPS

4%

Revenue Estimate

$4.39 billion

Change From Year-Ago Revenue

2.1%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Can Medtronic keep its earnings healthy this quarter?
In recent months, analysts have very modestly marked down their views on Medtronic's earnings, cutting the April quarter's estimate by a penny per share and the full-year fiscal 2014 projection by $0.02 per share. The stock, though, has advanced a bit, rising 6% since mid-February.

As the leader in spinal and cardiovascular implants, Medtronic is one of the purest plays on medical devices among big companies. Johnson & Johnson (NYSE: JNJ  ) certainly has a substantial medical-device business, but it's part of a much bigger health-care conglomerate that spans over-the-counter consumer products, as well as pharmaceuticals. Abbott Labs (NYSE: ABT  ) , meanwhile, also has other major businesses, including its generic drug division and its nutritional products. Not being pure plays leaves J&J and Abbott less exposed to the industry's particular challenges, but it also waters down the growth prospects from medical devices.

Yet Medtronic has suffered from overall industry weakness in the cardiovascular market. Rivals St. Jude Medical (NYSE: STJ  ) and Boston Scientific (NYSE: BSX  ) both joined Medtronic in posting substantial declines in their cardiac-rhythm management businesses, with St. Jude seeing a double-digit percentage contraction in pacemaker sales in its most recent quarter. Even as Abbott and J&J have been able to overcome weakness in their medical-device divisions because of their business diversity, Medtronic has to make do with its area of expertise.

One of Medtronic's answers to Obamacare's tax increase has been to shift hiring abroad, focusing on China as a potential target for expansion. But even beyond Obamacare, Medtronic's international push is part of its overall business strategy, and its acquisition last year of China's Kanghui Holdings, a specialist in orthopedics, will go a long way toward helping Medtronic meets its goal of getting 20% of sales from emerging markets by 2016.

In Medtronic's quarterly report, be sure not to overlook the company's smaller endovascular and neuromodulation divisions. In past quarters, those businesses have looked promising, and if the company's focus on the heart proves to be less than ideal, then bolstering those divisions could hold the key to a revival of Medtronic's prospects going forward.

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  • Report this Comment On May 19, 2013, at 12:39 PM, yamanoor2 wrote:

    Er...these companies have bigger problems which predate Obamacare. They will not only benefit from ACA but get to hide behind it, all their several shortcomings!

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