Medtronic Profit, Sales Seen Rising in 2Q -- Earnings Preview

By Joseph Walker

Medtronic Inc. (MDT) is scheduled to announce its second-quarter earnings for fiscal year 2015 before the market opens Tuesday. Here's what you need to know:

EARNINGS FORECAST: Analysts, on average, are expecting per-share earnings excluding certain items of 96 cents, according to Thomson Reuters, up from 91 cents a year ago. The company hasn't provided earnings guidance for the second quarter.

REVENUE FORECAST: Revenue of $4.37 billion is forecast, compared with $4.19 billion reported a year earlier.

WHAT TO WATCH:

--PRICING PRESSURE: Hospitals continue to squeeze medical device makers on price, particularly in Medtronic's core pacemaker and implanted defibrillator businesses. The company said in August it was seeing average sale prices in the U.S. fall by 3% to 5% in both product categories. A new type of defibrillator made by Medtronic, approved by the FDA in August, should command a higher premium than older products and help offset continued price declines.

--HEART VALVES: Medtronic could benefit from fast-growing U.S. demand for nonsurgical heart valves. Edwards Lifesciences Corp. (EW), the U.S. market leader, blew away sales estimates when it reported earnings in October, indicating the U.S. market may have doubled from last year, Derrick Sung, a Sanford C. Bernstein analyst, said in a note to clients last week. Mr. Sung forecasts Medtronic to have captured 40% of the U.S. market and to report $160 million in global valve sales.

--INVERSION COMMITMENT: Look for signs Medtronic is getting cold feet about its planned merger with Covidien PLC (COV). In October, Medtronic shares rallied when it signaled its commitment to Covidien by agreeing to partly finance the deal with $16 billion in debt rather than use its overseas cash in response to U.S. Treasury rules changes aimed at deterring so-called tax inversions. Comments by Medtronic executives that suggest they could back away from the deal, or are worried about the impact of the tax rules changes, will create new uncertainty.

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