Medtronic (MDT): Will Currency Woes Hurt Q4 As Well?

On May 26, 2016, we issued an updated research report on Medtronic plc (NYSE:MDT) . The company, which is slated to report its fourth-quarter and fiscal 2016 earnings on May 31, had missed the Zacks Consensus Estimate for revenues in the third quarter while earnings met the mark.

Unfavorable currency movements had been a major dampener during the third quarter, as in the case of other important MedTech players too. With the trend expected to linger, the company’s revenues may be hit by fluctuations in foreign exchange rates, going forward. Considering this impact, for the fourth quarter of fiscal 2016, Medtronic expects currency headwinds to the tune of approximately $180−$220 million (based on current exchange rates) on revenues.

However, the consolidated company demonstrated strong segmental performances in the third quarter, reflecting successful integration and achievement of synergy targets. All four major business groups contributed to solid top-line growth in the last reported quarter, demonstrating sustainability across groups and regions.

According to management, the Covidien integration is on track and is meaningfully accelerating all three fundamental growth strategies of Medtronic – therapy innovation, globalization and economic value.

The combined company should generate significant free cash flow, a substantial percentage of which will be deployed with much greater flexibility. This cash flow will ensure better investment in U.S. healthcare technologies as well as enhanced shareholder returns.

Medtronic is resorting to all possible means to boost growth. This includes penetration in emerging markets, expansion of its portfolio and restructuring of initiatives. These should benefit the company over the long term. We are also encouraged by Medtronic’s recent foray into the rapid growing transcatheter mitral valve replacement (TMVR) market through its recently completed $458 million acquisition of California-based medical device start-up firm – Twelve, Inc.

However, on the flip side, we note that the company is currently entangled in multiple legal issues which are weighing on the bottom line. Moreover, a soft economy and tough competition headwinds keep us on the sidelines.

At the moment, Medtronic retains a Zacks Rank #3 (Hold).

Key Picks in the Sector

Some medical product stocks worth a look are Boston Scientific Corporation (NYSE:BSX) , ICU Medical, Inc. (NASDAQ:ICUI) and LeMaitre Vascular, Inc. (NASDAQ:LMAT) . All three stocks carry a Zacks Rank #2 (Buy).