Medtronic On Track With Covidien Synergy, Buys HeartWare

On Aug 26, 2016, we issued an updated research report on Medtronic plc (NYSE:MDT) . The company’s first-quarter fiscal 2017 earnings per share edged past the Zacks Consensus Estimate while revenues came close to our expectation.

The consolidated company demonstrated strong segmental performances on a constant currency, constant weeks (CCCW) basis, displaying successful integration and achievement of synergy targets. All four major business groups contributed to solid top-line growth which, according to the company, highlighted sustainability across groups and regions.

The consolidated company has successfully demonstrated strong segmental performances, reflecting successful integration and achievement of synergy targets. All four major business groups contributed to solid top-line growth on above-market revenue growth which, according to the company, highlighted sustainability across groups and regions.

The Covidien integration has been delivering robust operating leverage to date. The consolidation has started to work on strengthening the combined company’s long-term market competitiveness while driving sustainability and consistency in its long-term financial performance.

The combined entity is likely to generate about $27 billion in total annual revenue, including $3.7 billion from the emerging markets. Fiscal 2017 onwards, the deal is anticipated to prove considerably accretive to cash earnings. The transaction is also estimated to be neutral to the company’s earnings by fiscal 2019 and accretive thereafter.

We are also looking forward to Medtronic’s recently completed acquisition of HeartWare International, a global medical device manufacturer dedicated to serve patients with advanced heart failure, for a deal value of $1.1 billion. Medtronic believes the acquisition to expand its leadership across the heart failure continuum. This deal is also expected to aid Medtronic in offering much more advanced less-invasive heart pumps.

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.

However, on the flip side, we note that the company is currently entangled in multiple legal issues which are weighing on the bottom line. Additionally, continued currency headwind, softer economy and tough competition headwinds keep us on the sidelines. Although during the first quarter, the currency impact was not significant, we can hardly rule out the possibility of severe currency impact on the company’s performance in future. For fiscal 2017, Medtronic estimates currency headwind to the tune of approximately 20 cents to 25 cents based on current exchange rates on earnings.

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

Key Picks in the Sector

Some better-ranked medical product stocks are NuVasive, Inc. (NASDAQ:NUVA) , Quidel Corp. (NASDAQ:QDEL) and GW Pharmaceuticals plc (NASDAQ:GWPH) . All the three stocks sport a Zacks Rank #1 (Strong Buy).