Earnings Scorecard: St. Jude - Analyst Blog

St. Jude Medical Inc. (STJ) posted solid second quarter fiscal 2010 results on July 22, 2010, with adjusted earnings per share of 79 cents cruising past the Zacks Consensus Estimate of 73 cents (representing a 8.22% positive surprise), buoyed by healthy revenue growth across the board.

Revenues surged 11% year over year to $1,313 million, beating the Zacks Consensus Estimate of $1,289 million. Growth was led by favorable foreign currency translation and solid ICD sales, which soared 18% to $471 million, helped by the suspension of ICD devices by rival Boston Scientific Corporation (BSX). However, the encouraging ICD growth, by some measure, was masked by a sluggish pacemaker business.

The Minnesota-based medical devices giant posted double-digit sales growth across its Atrial Fibrillation and Neuromodulation segments in the quarter. Moreover, effective cost-management fuelled operating margin expansion. Based on the encouraging results, St. Jude raised its earnings forecast for fiscal 2010.

We have discussed the quarterly results at length here: St. Jude Cruises, Lifts Guidance

Agreement – Estimate Revisions

Estimates for St. Jude are on the upswing, manifesting a reflection of the forecast-beating second quarter results and management’s upbeat guidance. Out of a total of 21 analysts currently covering the stock, 18 have raised their estimates for fiscal 2010 over the past week with no negative revisions.

Likewise, estimates for 2011 reflect a strong bullish sentiment with 18 out of 29 analysts lifting their forecasts over the last 7 days while just 1 analyst moving in the opposite direction.

The optimism among the analysts also reflect improved earnings visibility, encouraging growth prospects in the company’s core ICD business, sales re-organization, solid inventory position and favorable product pricing and market trends. The strong positive sentiment not only exerts a meaningful impact on the Zacks Rank, but also reflects the potential for significant upward pressure on the stock.

Magnitude – Consensus Estimate Trend

A plethora of upward estimate revisions accompanied by a sheer directional agreement has led to a significant rise in annual forecasts for St. Jude. Estimates for fiscal 2010 and 2011 have gone up by 6 cents and 4 cents, respectively, over the last week. The current Zacks Consensus Estimate for 2010 is $2.90, representing a 19.18% year-over-year growth.  

Our Take

We remain intrigued by St. Jude’s ability to deliver consistent revenue and earnings growth. Moving forward, multiple product introductions are expected to drive top-line expansion.

St. Jude’s ICD business has benefited in the last two quarters from Boston Scientific’s temporary suspension of ICD sales due to certain changes in the manufacturing process not approved by the federal regulators. Launch of several ICD products in the U.S. and Europe should boost the company’s CRM market share in fiscal 2010. St. Jude currently holds a 25% share in the global ICD market and is poised to expand its position driven by a favorable device replacement cycle and the recently launched Unify and Fortify systems. 

Earnings for the remainder of fiscal 2010 are expected to benefit from the federal research and development tax credit, which is due to be extended in 2010. Moreover, cardiovascular sales will be boosted by several new products launches in second-half 2010 and the recent acquisition of medical technology firm LightLab Imaging, which has broadened opportunities in the fast-growing Fractional Flow Reserve (FFR) market.

Neuromodulation represents another lucrative platform for St. Jude, which offers its spinal cord stimulators in this nascent, but fast-growing market. Growth in this segment will be fostered by the roll-out of the deep brain stimulation (DBS) system in Europe in the second half.

St. Jude is well positioned to savor incremental opportunities in the CRM segment (especially in ICDs) on the back of a strong product pipeline and technology advancements. Other positive factors are represented by solid fundamentals, healthy growth trajectory, strong product mix and improved operating leverage.

However, the company is challenged by competition-driven pricing pressure and the heightened competition in a mature pacemaker market. Moreover, we are cautious about the dilutive impact of the LightLab acquisition and any unfavorable currency exchange fluctuations on the bottom line. This is reflected in our Neutral recommendation for the stock, which is supported by a Zacks #3 Rank (Hold).

About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard" articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.

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