Waiting for Medtronic's Next Hit

Analysts hope for an update on the company's drug-coated stent when it reports earnings today.
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Medtronic

(MDT) - Get Report

approaches its fourth-quarter financial report with a big fan club on Wall Street and an uncanny ability to produce financial results that meet Wall Street's expectations.

The Minneapolis-based company will announce fourth-quarter results on Monday after the markets close, putting on the line a string of eight consecutive quarters in which its earnings per share matched the consensus view of analysts polled by Thomson First Call.

For the fourth quarter, which ended April 30, analysts are looking for earnings of $561.3 million, or 46 cents a share, on revenue of $2.46 billion. For the same period last year, Medtronic earned $487.1 billion, or 40 cents a share, on revenue of $2.15 billion.

The consensus for the fiscal year ended April 30 is for a profit of $1.97 billion, or $1.62 a share, on revenue of $8.88 billion. For the previous fiscal year, Medtronic earned $1.6 billion, or $1.30 a share, on revenue of $7.67 billion.

With a market capitalization of $59.7 billion, Medtronic is twice as big as its nearest competitor. The company has strong Wall Street support with 27 buy recommendations (vs. four holds and two sells). But Medtronic's stock has vacillated over the past 12 months, with the net result being that it has barely budged.

The stock performance should be one of the issues addressed by analysts Monday, especially how the stock price will be affected by an experimental product. Analysts will try to extract more insight into the prospects for Medtronic's drug-coated stent, a wire mesh tube inserted into arteries. The stent facilitates blood flow in patients who have undergone a procedure to disperse vessel-clogging plaque.

Medtronic's financial report is due one day before results are scheduled to be published in Paris for a European clinical trial of the company's stent. The test is a 12-month follow-up to a previous study of the device, also called a drug-eluting stent because it periodically releases medication to help keep arteries clear.

Analysts want to know if they're being too optimistic about Medtronic getting its stent onto the U.S. market in 2005. The test results "will hopefully provide confirmation of the competitiveness of Medtronic's drug-eluting stent," said Bruce M. Nudell of Sanford C. Bernstein & Co. in a recent research report to clients. Nudell has an outperform rating on the stock. (He doesn't own shares, and his firm doesn't have an investment banking relationship with the company.)

Medtronic is pursuing two other companies,

Johnson & Johnson

,

(JNJ) - Get Report

whose Cypher stent reached the U.S. market 13 months ago, and

Boston Scientific

(BSX) - Get Report

, which started selling its Taxus stent in the U.S. in March. Both companies also sell drug-coated stents in foreign markets. Another big medical device company,

Guidant

,

(GDT)

is also working on a drug-coated stent.

Generally speaking, Nudell said that Medtronic's "breadth and strong cash flow place the company in a strong position for 'the next big things' in 2007." Nudell also suggested that Medtronic has gotten big enough that it may consider divesting some slower-growing businesses.

"While anticipated stock upside is not explosive, the predictable earnings growth provides strong downside protection," he added.

One of Medtronic's current "big things" is its implantable cardioverter device, or ICD, business, whose products are surgically implanted into patients and deliver electrical charges that shock the heart into resuming a normal rhythm. The ICDs are used to treat dangerously rapid heartbeats that could be fatal.

Adam Galeon of Credit Suisse First Boston recently raised his quarterly sales estimate on ICD sales to $555 million from $533 million. His prediction for ICD sales and his prediction of $495 million in quarterly sales for pacemakers illustrate why these products are so valuable to Medtronic; they could account for more than 40% of quarterly sales. Galeon has an outperform rating on the stock. (He doesn't own shares, and his firm says it expects to receive or seek investment banking-related compensation in the next three months.)