St. Jude Beats on All Fronts - Analyst Blog

Medical devices major St. Jude Medical (STJ) posted adjusted earnings per share of 75 cents for the fourth quarter and $3.01 for fiscal 2010, exceeding the Zacks Consensus Estimates of 74 cents and $2.99, respectively, and surpassing the year-ago earnings of 64 cents and $2.43, respectively. This represents the sixth consecutive quarter of outperformance.

Reported net earnings for the quarter surged 8.9% year over year to $206 million (or 62 cents a share) on the back of revenue growth across key segments.

Revenues

The Minnesota-based company posted fourth quarter revenues of $1,350 million and fiscal 2010 sales of $5,165 million, up 12% and 10%, respectively. Sales beat the corresponding Zacks Consensus Estimates of $1,323 million and $5,134 million.

Revenues were boosted by healthy sales across the board. Foreign currency translation trimmed sales by about $14 million in the fourth quarter while the recently acquired AGA Medical contributed $25 million to the top line.

The Quarter in Detail

Segment Results

Revenues from the Cardiac Rhythm Management (“CRM”) segment leapt 9% year over year (11% on constant currency basis) to $762 million riding on higher ICD sales, which soared 16% to $458 million. Pacemaker sales were relatively flat year over year at $304 million.

St. Jude and its competitors Medtronic (MDT) and Boston Scientific (BSX) are increasingly in a tug-of-war to grab CRM share. The company, in the recent past, cut its forecast for overall CRM market growth rates from the mid single digits to low single digits. It contends with competition-driven pricing pressure and heightened competition in a mature pacemaker market.

Atrial Fibrillation revenues rose 13% year over year to $193 million while neuromodulation revenues climbed 15% to $108 million. Neuromodulation represents an increasingly promising prospect (driven by new product introductions) for St. Jude.

Cardiovascular sales were up 20% to $287 million with vascular closure and heart valve sales coming in at $92 million (down 2%) and $87 million (up 10%), respectively.

Margins

Gross margin fell to 70.1% in the fourth quarter from 71.1% a year ago mostly on account of higher cost of sales. Selling, general and administrative expenses, as a percentage of sales, increased to 36.1% from 33.2% in the prior-period quarter.

Research and development expenses (as a percentage of sales) increased modestly to 12.9% from 11.2%. Operating margins fell to 19.8% from 23.6% a year ago.

Financial Condition

St. Jude exited the quarter with cash and cash equivalents of $500.3 million, a 27.3% year-over-year increase. However, long-term debt rose a sharp 53.2% year over year to $2,432 million.

Outlook and Recommendation

St. Jude has issued its earnings guidance for fiscal 2011. The company envisages adjusted earnings per share for the first quarter between 77 cents and 79 cents and projects full-year adjusted earnings in the range of $3.25 to $3.30 per share. The current Zacks Consensus Estimates for first quarter and fiscal 2011 are 78 cents and $3.27, respectively.

While St. Jude is poised to grow its CRM market share (especially in ICDs), it is challenged by competition-driven pricing pressure and heightened competition in a mature pacemaker market.

Moreover, we are cautious about the impact of unexpected currency exchange fluctuations on the bottom line. Our long-term Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

 
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