Foolish Forecast: Taking Medtronic to Heart

There's nothing like getting a medical device approved in the U.S. to really boost a company's earnings. It worked last quarter for Medtronic (NYSE: MDT), and investors should expect more of the same when the medical-device maker releases its earnings report tomorrow. Let's see what we can diagnose.

What analysts say:

• Buy, sell, or waffle? With buy ratings doubling up the holds -- 16 to eight -- and no sell recommendations, analysts clearly dig Medtronic's stock.
• Revenue. This quarter, analysts expect revenue to grow 17% year over year, to $3.67 billion.
• Earnings. Not all that growth is expected to trickle down to the bottom line. Earnings are expected to come in at $0.69, up just 11% year over year.

What management says:
This quarter marks the start of a new fiscal year for Medtronic. Management expects revenue to grow 11% to 15%, and earnings per share 13% to 16% higher than last fiscal year's non-GAAP EPS.

The big unknown is how much sales of its new drug-eluting stent are baked into that guidance. This quarter it had only two main competitors in the U.S. -- Johnson & Johnson (NYSE: JNJ) and Boston Scientific (NYSE: BSX) -- but for the rest of the year, it'll also have to deal with fellow newcomer Abbott Labs (NYSE: ABT), and potentially an updated stent from Boston Scientific as well.

What management does:
Medtronic has been able to keep gross and operating margins fairly stable, even in the face of a recalled product. The net margin dropped because of charges from a lawsuit and acquisitions of Kyphon and NDI Medical. These are all one-time events, so net income should eventually rebound.

Margins	1/2007	4/2007	7/2007	10/2007	1/2008	4/2008
Gross	74.6%	74.3%	74.3%	74.0%	74.3%	74.8%
Operating	31.3%	30.5%	30.4%	29.9%	29.8%	30.5%
Net	22.6%	22.8%	23.0%	22.8%	17.2%	16.5%
Free Cash Flow / Revenue	18.8%	19.6%	21.7%	22.9%	24.8%	22.0%

Revenue has been growing at a nicely steady clip. It's no Rule Breaker with double-digit sized growth, but then, not all your stocks need to be highfliers.

Growth (YOY)	1/2007	4/2007	7/2007	10/2007	1/2008	4/2008
Revenue	9.8%	8.9%	9.0%	6.5%	7.0%	9.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
With Johnson & Johnson and Boston Scientific already reporting seven- and five-point reductions in their respective shares of the U.S. drug-eluting stent market in the second quarter, it's clear that Medtronic has taken at least some of the business away from the entrenched leaders. Unfortunately, the quarters don't match up perfectly, so investors can't calculate exactly how much revenue from stent sales they should expect tomorrow.

The cardiac rhythm segment still leads Medtronic's revenue, so it'll be equally as important to see how it's recovering from the aforementioned recall. Medtronic has some tough competition in this segment, too -- St. Jude Medical (NYSE: STJ) saw sales jump 20% last quarter.

Investors should listen closely to the conference call to get a better idea of how the U.S. drug-eluting stent sales are going since Abbott launched. I continue to think that Abbott's stent will eventually dominate; the only question is whether Medtronic's head start will give it a competitive advantage, or just get cardiologists in the mind-set of trying out new stents.