3 Key Takeaways From Medtronic’s Earnings

Medtronic (MDT 1.45%) investors received a double dose of bad news on Tuesday: The medical device maker missed top-line estimates for the fourth quarter, then reported a big hit to its bottom line after reaching a patent settlement with rival Edwards Lifesciences (EW 1.90%). Shares slumped slightly, continuing Medtronic's yearlong trend of underperforming industry peers St. Jude Medical and Boston Scientific.

Source: Ycharts.

During the fourth quarter, Medtronic's revenue rose 2% year over year to $4.57 billion, but missed the consensus estimate by $10 million. Medtronic's generally accepted accounting principles-adjusted earnings fell 54% year over year to $0.44 per share, due to the patent settlement with Edwards Lifesciences and a product liability settlement. On a non-GAAP basis, earnings rose 2% year over year to $1.12 per share, matching the analyst estimate.

Let's look at three key takeaways from the first-quarter earnings to better gauge Medtronic's quality as an investment.

Cardiac growth remains slow but steady
Sales at Medtronic's cardiac and vascular group, its largest business segment, climbed 1% year over year to $2.4 billion.

Revenue from cardiac rhythm disease management, or CDRM, which includes its pacemakers and defibrillation systems, rose 1% to $1.4 billion. Medtronic reported strong international adoption of the Viva XT CRT-D pacemaker, which resynchronizes to the patient on a minute-to-minute basis. Medtronic also launched the world's only full-body MRI-compatible pacemaker, the Evera MRI, in Europe.

Medtronic's main rival in that market, St. Jude Medical, reported similar results last quarter -- sales of its cardiac rhythm management devices rose 1% to $687 million. Boston Scientific has fared worse than Medtronic and St. Jude, as sales at its cardiac rhythm segment fell 3% last quarter to $466 million.

Medtronic's structural heart revenue rose 9% year over year to $337 million, thanks to the U.S. launch of CoreValve, a self-expanding catheter system for severe aortic stenosis. However, following its patent settlement over the CoreValve, Medtronic must now pay quarterly royalty payments (at a minimum rate of $40 million annually) to Edwards Lifesciences through April 2022. Edwards will also receive a one-time payment of $750 million.

Medtronic trails Stryker in restorative therapies
Medtronic's second-largest business, its restorative therapies group, consists of spine, neuromodulation, and surgical technology products. First-quarter revenue in the segment climbed 2% year over year to $1.74 billion.

Medtronic's main competitor in these three fields is Stryker (SYK 0.99%). A comparison of the two companies shows that although Medtronic generates more revenue in each of the categories, Stryker is growing at a faster rate.

Sources: Company quarterly reports, all growth percentages as reported.

While Medtronic recently highlighted some impressive products from the three categories, including its Activa "brain pacemaker" and new tools for surgeons, these newer products haven't yet become major sources of sales growth. The results from Medtronic and Stryker also show that demand for surgical technology and neurotechnology is outpacing demand for spinal products by a wide margin.

Medtronic's diabetes group is its fastest-growing business
Medtronic's diabetes group, its smallest business segment, reported robust revenue growth during the quarter, thanks to strong demand for the MiniMed 530G with Enlite CGM (constant glucose monitoring) sensor -- a self-regulating insulin pump system dubbed as the first "wearable artificial pancreas".

The MiniMed 530G system, which the FDA approved last October, automatically shuts off insulin delivery if a user's glucose level falls below a certain threshold. Since the launch of the MiniMed 530G with Enlite CGM, Medtronic estimates that it has gained over 5 percentage points in the U.S. insulin pump market and over 6 percentage points of the U.S. CGM market.

Revenue at Medtronic's diabetes group rose 13% year over year to $460 million, making it the company's fastest-growing business. However, investors should note that Johnson & Johnson's Animas division and Dexcom have developed a competing product, the Animas Vibe, which could be approved by the FDA later this year.

The Foolish takeaway
Medtronic is a mixed bag as an investment. Although it has some highly innovative products in its portfolio, its slower-growth businesses tend to offset its higher-growth units.

Medtronic has kept its CRDM business growing at a healthy rate, even as smaller rivals such as Boston Scientific have fallen behind. However, Medtronic still trails Stryker's growth rate in spinal care, neurotechnology, and surgical tech. Meanwhile, Medtronic's diabetes business has posted impressive growth, but it's unclear if the company can maintain that momentum once the Animas Vibe hits the market.