Medtronic Could Report Rise in Net Profit Margins in Fiscal 2018



Margin performance in 1Q18

Despite a temporary supply constraint for sensors required to fulfill the demand for diabetes medical devices and disruption in the information technology system in 1Q18, Medtronic (MDT) managed to report non-GAAP operating margins of about 26.9% on a constant currency basis, which is year-over-year (or YoY) increase of around 50 basis points. The company’s non-GAAP operating margin witnessed a YoY increase of ten basis points in 1Q18 on a reported basis. Excluding the impact of currency and acquisitions, Medtronic’s non-GAAP operating margin rose YoY by 70 basis points in 1Q18, driven mainly by cost efficiencies arising from the effective integration of Covidien. Ongoing investments in selling and marketing activities, however, affected the company’s operating margins in 1Q18.

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Robust operating margins and tax benefits were instrumental in driving the company’s non-GAAP earnings per share to $1.12, which is YoY growth of around 11% on a constant currency basis and YoY growth of 9% on a reported basis. Operating margin improvement, tax benefits, and share repurchases contributed 200 basis points, 300 basis points, and 200 basis points, respectively, to Medtronic’s YoY non-GAAP EPS growth. In 1Q18, the company also reported GAAP EPS close to $0.74, which is YoY growth of 12%. If Medtronic manages to achieve the targeted $850 million worth of synergies arising from the integration of Covidien, it could have a favorable impact on the company’s share prices as well as those of the iShares Core S&P 500 ETF (IVV). Medtronic makes up about 0.51% of IVV’s total portfolio holdings.

Small rise in net profit margins

Wall Street analysts have projected Medtronic’s fiscal 2018 net profit margins to be about 14.5%, which will be YoY improvement of around 90 basis points.

Peers such as Boston Scientific (BSX), Edwards Lifesciences (EW), and Abbott Laboratories (ABT) are expected to earn revenues close to 13.9%, 23.5%, and 8.9%, respectively, in 2017.

In the next article, we’ll discuss the performance of Medtronic’s diabetes franchise in 2017 in greater detail.


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