3 Need-to-Know Takeaways From Medtronic's Earnings

It was show time for Medtronic (NYSE: MDT  ) and medical device investors yesterday, as the world's largest pure medical device maker reported its first-quarter results of the 2014 fiscal year.

Overall, Medtronic pulled off a mixed bag of a quarter, as the company's top line slumped by 3% year-over-year to fall short of analyst expectations. To counteract that, Medtronic's net income jumped 10% over 2013's first quarter, and an adjusted EPS score of $0.88 matched average projections for the company. That wasn't enough to save Medtronic's stock from a sharp 2.4% decline on the day, however, a big stumble for shareholders who have gotten used to the stock's 28.8% year-to-date gains.

Let's take a deeper look beyond the broad numbers, however, to see just where Medtronic's leading -- and lagging -- in the device industry. Here are three key takeaways from this device giant's quarter.

High-growth fields on the rise
Even with Medtronic's sales taking a hit, the company's making solid progress on some innovative areas that investors need to watch.

Medtronic's neuromodulation sales climbed 3% for the quarter, a modest but welcome increase for a business that's been picking up across the industry. The segment isn't Medtronic's largest, or even close -- it only pulled in $428 million for the quarter, around 60% of what the company generated in spine product sales. Still, neuromodulation products have been on the rise around other leading device makers. Stryker's (NYSE: SYK  ) one of the top names in devices, and its neurotech business pulled in nearly 7% growth in the company's most recent quarter, and if Medtronic can match those kind of numbers in the future, neuromodulation will become a major part of this company's Restorative Therapies division.

Shifting business segments, Medtronic's CoreValve heart valve has garnered a lot of attention recently, particularly as the company battles rival Edwards Lifesciences (NYSE: EW  ) and its Sapien valve in legal and sales fights. That didn't keep this device down, however, as the CoreValve helped Medtronic's small but high-growth Structural Heart segment pull in 12% operational growth for the quarter.

CoreValve has a long way to go to match Edwards's Sapien -- after all, the latter's the only product in the industry to be approved in the U.S., leaving Medtronic's device to fight for European and other international sales so far. However, the Sapien's sales have slowed in recent quarters, and if Medtronic can take advantage of Edwards' declining momentum, the CoreValve might become a real star for this company in future quarters.

A weak beat from heart sales
Despite the CoreValve's success, however, Medtronic's cardiac device sales haven't quite hit the mark recently.

Heart devices across the industry have had a rough go over the past few years, so Medtronic's flat sales from its Cardiac Rhythm Device Management division weren't all that surprising. Unfortunately, Medtronic hasn't figured out how to boost its defibrillator revenue just yet, as implantable cardioverter defibrillators, or ICDs, lost 2% in revenue.

It's a problem endemic to Medtronic's rivals. Cardiac competitor Boston Scientific (NYSE: BSX  ) posted a better-than-expected quarter recently, but its own ICD revenue fell by nearly 4% year-over-year. Unfortunately for both Medtronic and Boston, ICDs make up a significant chunk of sales. ICDs comprised more than 16% of the former's total sales in this quarter alone.

Medtronic's other divisions have held up this struggling segment, but if Medtronic can't turn these modest sales declines into the black, defibrillators will continue to hold back the company's cardiac revenue in the future.

Counting on international strength
Fortunately, Medtronic has found one key solution to avoiding the U.S. device market's slowdown: international sales.

International revenue jumped 6% year-over-year for the quarter, good enough to make up a full 46% of Medtronic's total sales. Emerging markets particularly hit the gas, jumping a whopping 15% year-over-year. In a time when U.S. and European sales are falling flat, it's of the utmost importance that Medtronic keeps its foot firmly on the pedal in high-growth regions.

It's a strategy that could pay off in a big way across the medical device industry for years to come. China has already emerged as a force in the health care world, but with concerns about the country implementing price controls, other markets, such as Latin American giant Brazil and massive India, have become equally important to device companies looking for geographical growth.

It has certainly worked for Medtronic competitor Smith & Nephew (NYSE: SNN  ) so far, which reaped 11% emerging market and international sales growth last year -- not bad for a division that made up 12% of total revenue. If Medtronic can keep up double-digit sales growth in emerging markets like Smith & Nephew did in 2012, it'll be poised to cement its dominant status in the device industry across the globe.

Can Medtronic stay on top?
Investors may have dumped Medtronic's stock following its report, but the quarter's nothing to panic over -- and certainly not something to radically alter your investing thesis on. While Medtronic's cardiac sales, and defibrillators in particular, remain under pressure, the company's succeeding in areas that will go a long way to cementing a solid future.

The quarter didn't offer a home run, but for long-term investors, Medtronic's still as good as it gets in the device industry.

Medtronic's size, strength, and experience make it a solid pick for investors willing to be patient over the years. After all, there are few better, proven investing strategies than buying into great companies and holding shares for the long run. The Motley Fool's special free report "3 Stocks That Will Help You Retire Rich" names specific investment opportunities that could help you build long-term wealth and help you retire in financial freedom. The Fool also outlines critical wealth-building strategies that every investor should know. Click here to keep reading.


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