Oppenheimer Previews Medtronic's Q4 Earnings, Remains Bullish

Oppenheimer expects Medtronic PLC (NYSE: MDT) to report "overall in-line" results when the medical device maker reports its fourth-quarter numbers on May 31. The brokerage also noted that the company's operating margin outlook is "achievable."

Earnings Expectations

Oppenheimer expects fourth-quarter EPS of $1.26 on revenue of $7.5 billion, while the Street expects earnings of $1.27 a share on revenue of $7.48 billion. Medtronic expects fourth-quarter operating margin of 31-31.3 percent, up from 27.8 percent reported in the third quarter.

The operating margin came in to the limelight after the third quarter was light due in part to FX headwinds. However, the brokerage said a weaker dollar would provide the company additional cushion to deliver on Q4 margin targets.

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"Our analysis suggests MDT will need to deliver ~160bps of op margin expansion constant currency F3Q-to-F4Q to hit guidance. While not an easy bar, we see this as achievable based on estimated Covidien synergies and normal end-of year leverage," analyst Steven Lichtman wrote in a note.

Among others, the results may provide an insight in to several pipeline initiatives on "MDT's diagnostics platform, new diabetes systems, mitral valve replacement, leadless pacing, TAVR for lower-risk patients."

The analyst will also monitor any updates on the progress in emerging markets, which accounted for 13 percent of sales in the fourth quarter.

Guidance

On the guidance front, Lichtman said, "We look for guidance to bracket consensus."

The analyst projects FY17 EPS of $4.69 on sales of $29.7 billion, implying a growth of 7.5 percent and 3.5 percent, respectively, from last year. Street expects EPS of $4.70 on revenue of $29.64 billion.

In addition, the analyst assumes the company will raise its dividend mid-teens over the next two years, reaching a 40 percent payout ratio.

"Including use of recently unlocked US cash, we look for ~$3.1 billion in share repurchases/year on average FY17–FY18, with flexibility to repurchase an additional almost $1 billion/year," Litchman highlighted.

Catalysts Moving Forward

In addition, two catalysts post-quarter include the June 6 analyst day and a dividend raise announcement mid-June. The company should benefit from sales growth in diagnostics, AF, Corevalve, drug-coated balloons, surgical technologies and diabetes.

"We continue to see cash flow flexibility providing upside opportunities ahead," said Litchman who maintains his Outperform rating and $86 price target on the stock.

At the time of writing, shares of Medtronic were up 0.22 percent to $81.12.