What's In The Cards For Medtronic (MDT) In Q4 Earnings?

Ireland-based medical device major Medtronic plc (NYSE:MDT) is slated to report its fourth-quarter and fiscal 2016 earnings on May 31, before the opening bell.

Last quarter, the company delivered in line earnings. Barring this quarter, Medtronic’s earnings have outpaced the Zacks Consensus Estimate in the rest of the past four quarters, with an average beat of 2.12%. Let’s see how things are shaping up prior to this announcement.

MEDTRONIC Price, Consensus and EPS Surprise

MEDTRONIC Price, Consensus and EPS Surprise | MEDTRONIC Quote

Factors at Play

Despite the fact that Medtronic continues to be plagued by strong foreign exchange headwinds, the company’s robust operations render optimism for a brighter fourth quarter of fiscal 2016. The company, in its fiscal third-quarter earnings call, noted that revenue growth for the fourth quarter will remain in the range of 5%−5.5% at CER, which is consistent with management’s prior outlook of second-half revenue to be at the upper-half of its mid-single-digit baseline goal.

This was based on the company’s earlier assumption that during this period, its Minimally Invasive Therapies Group (MITG) will grow in the low-to-mid single digits, Restorative Therapies Group (RTG) will demonstrate mid-single-digit growth, Cardiac and Vascular Group (CVG) will grow in the mid-to-high single digits, and Diabetes will grow in the high-single to low-double-digit range.

We are optimistic on this balanced growth forecast across all the business groups of Medtronic, and expect the same to be reflected in the fourth quarter itself. However, the company’s prediction on the impact of currency movement continues to pose a concern.

According to Medtronic, negative impact from foreign currency translation in the fourth quarter is expected to remain in the range of $180−$220 million, based on current exchange rates. On the bottom-line front, for fiscal 2016, earnings per share are expected in the range of $4.36−$4.40, which still includes an expected 45–50 cents of negative currency impact based on current exchange rates.

Over the past few quarters, Medtronic’s core Spine revenues have been a major overhang, persistently underperforming the broader market growth. Although, of late the company witnessed growth in international Core Spine and U.S. BMP, severe weakness in U.S. Core Spine continues to outweigh this growth.

However, with the recent realignment of RTG commercial sales management, the implementation of the surgical synergy programs as well as the numerous recent and upcoming product launches, Medtronic strongly expects a change of trend in the U.S. core Spine performance down the line.

On the other hand, as far as the Covidien acquisition is concerned, Medtronic is making excellent progress with the integration of Covidien which has already started to deliver robust operating leverage. In this regard, we should take note that the company is currently working on its fiscal 2016 value capture initiative target, exceeding the earlier expected savings target of $300−$350 million by the end of the current fiscal.

Earnings Whispers

Our proven model does not conclusively show that Medtronic is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Medtronic has an Earnings ESP of 0.00%. That is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.06.

Zacks Rank: Medtronic has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat this quarter:

The Bank of Nova Scotia (TO:BNS) , Earnings ESP of +5.5% and a Zacks Rank #2.

Frontline Ltd. (NYSE:FRO) , Earnings ESP of +32.26% and a Zacks Rank #2.

Southern Copper Corp. (NYSE:SCCO) , Earnings ESP of +33.33% and a Zacks Rank #1.