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How Medtronic Plans to Recover from Its Profit Decline in Fiscal 2Q18

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Overview

In fiscal 2Q18,[1. fiscal 2Q18 ended October 2017] Medtronic (MDT) reported net adjusted profits of ~$1.5 billion. The results represented a decline of ~7.0% in the company’s profits on a YoY (year-over-year) basis. This included the negative impact of ~3.0% resulting from Hurricane Maria.

MDT’s operating margin comprised ~26.6% of the total sales reported in fiscal 2Q18, representing a YoY decline of 1.0% on a comparable constant currency basis.

Major factors that impacted MDT’s fiscal 2Q18 margin

Medtronic (MDT) had a considerable number of new product launches in fiscal 2Q18, which led to higher SG&A (selling, general, and administrative) expenses. The continued weakness in its Diabetes segment sales and the infusion pumps recall led supply constraints to pressure the company’s margins in the quarter.

However, these are temporary headwinds, and the Diabetes segment’s sales have started improving with recovery in its inventory levels.

Other expenses for Medtronic (MDT) registered a significant increase from fiscal 2Q17. These expenses impacted the company’s operating margin by ~0.20% on a comparable constant currency basis.

These expenses included investment in the currency hedging program and gains from its hardware equity investment in fiscal 2Q17.

Management’s expectations

Medtronic (MDT) expects to register better margins over the rest of fiscal 2018, especially in fiscal 4Q18. The company expects to drive this growth via its cost-reduction and optimization initiatives.

Medtronic expects to deliver the Covidien synergies of $850.0 million by the end of fiscal 2018. MDT noted that it is confident of delivering continued margin improvements driven by its cost-cutting and optimization measures. These initiatives include plant consolidation, process improvements, and shared and services usage increases.

For the rest of the year, Medtronic expects to have a negative impact of ~50–100 basis points from foreign exchange on the company’s operating margin. Fiscal 4Q18 is expected to experience higher currency headwinds.

Peers and ETF investment

In their recently reported quarters, MDT’s peers Becton, Dickinson and Company (BDX), Stryker (SYK), and Abbott Laboratories (ABT) registered operating margins of 14.0%, 17.4%, and 11.9%, respectively, of their total sales.

Investors can consider investing in the Vanguard Total Stock Market ETF (VTI) for indirect exposure to Medtronic. MDT comprises ~0.43% of VTI’s total portfolio.

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