Medical devices major St. Jude Medical 's ( STJ ) fourth-quarter 2011 adjusted earnings per share of 86 cents beat the Zacks Consensus Estimate by a couple of cents and exceeded the year-ago earnings of 75 cents.

Highlights from the Quarter

Profit (as reported) for the fourth quarter slipped roughly 21% year over year to $163.4 million (or 51 cents a share) as higher sales were overshadowed by lofty special charges.

Revenues rose 4% year over year to $1,406.9 million, beating the Zacks Consensus Estimate of $1,400 million. Double-digit growth across the company's Atrial Fibrillation, Cardiovascular and Neuromodulation segments was partly masked by the decline in the core Cardiac Rhythm Management ("CRM") division.

Revenues from the CRM division fell 4% year over year, indicating sustained softness in the U.S. ICD market. ICD revenues clipped 5% and pacemaker sales declined 4% in the quarter.

Atrial Fibrillation and Neuromodulation businesses posted healthy growth in quarter with revenues surging 13% and 12% year over year, respectively. Revenues from the cardiovascular franchise climbed 18%, backed by the contributions of AGA Medical.

We have discussed the quarterly results at length here: St. Jude Beats, Charges Hurt Net.

Agreement - Estimate Revisions

Estimates for St. Jude are on downswing following the fourth quarter results. Out of 22 analysts covering the stock, 2 have lowered their estimates for fiscal 2012 over the past week with none raising their forecasts. Over the past month, 18 analysts have truncated their forecasts for the year with 3 moving in the opposite direction.

Estimates for the first quarter elicit somewhat similar trend with 4 (out of 18 analysts) having chopped their estimates over the past 7 days with no reverse movements. There were 11 downward revisions over the past month coupled with a solitary opposite movement. The bearish sentiment reflects the impact of an unfavorable foreign exchange environment on earnings in 2012.  

Magnitude - Consensus Estimate Trend

There has been an increase of a penny in the estimate for fiscal 2012 over the past week. However, given a plethora of downward revisions, estimate for the year have fallen by a 7 cents over the past month. For the first quarter, estimate (of 83 cents) remained stationary over the last 7 days while declining by 2 cents over the past 30 days.

Neutral on St. Jude

St. Jude is consistently producing revenue growth and positive earnings surprises over the past several quarters. We are impressed by its solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives. A spate of new growth drivers (including new products and emerging markets) are expected to offer opportunities for accelerated sales growth in 2012 and beyond.

St. Jude is poised for incremental opportunities in CRM on the back of strong product momentum, despite soft market conditions. The company's Fortify and Unify devices are gaining notable traction and increased penetration of these products should enable it to expand its position in CRM.

St. Jude achieved a major milestone during the fourth quarter as it secured the U.S. approval for its much-awaited Unify Quadra cardiac resynchronization therapy defibrillator ("CRT-D"), the industry's first quadripolar pacing system. St. Jude is currently the only company to offer this technology globally.

Unify Quadra, which is also approved in Europe, is expected to help the company win ground in the highly competitive U.S. defibrillator space in 2012. St. Jude is also expected to benefit from favorable replacement cycle and a new distributor in Japan.

Moreover, the company's strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart failure management.

In Atrial Fibrillation, new irrigated ablation catheters for treating cardiac arrhythmias should help St. Jude sustain the healthy growth in 2012. Growth in St. Jude's Neuromodulation business will be fostered by the expanded adoption of deep brain stimulation ("DBS") systems.

Moreover, U.S. approval of the DBS system in Parkinson's disease (expected in 2013) represents another promising prospect. St. Jude's DBS business is poised for a robust growth in 2012, in part, driven by the impressive results from the first controlled study of its DBS systems (Libra and LibraXP) for Parkinson's disease, which was recently published in The Lancet Neurology journal.

On the Cardiovascular front, emerging opportunities across a slew of fast-growing therapy areas such as transcatheter aortic valve implant ("TAVI"), percutaneous mitral valve repair ("PMVR"), left atrial appendage ("LAA") and renal denervation should set the stage for growth in the years ahead.

Among the emerging opportunities, St. Jude is optimistic to enter the European TAVI market with its Portico valve before end-2012. Moreover, the company is expected to launch the PMVR technology in Europe before end-2013 and its renal denervation catheter by end-2012.

However, St. Jude and its peers Medtronic ( MDT ) and Boston Scientific ( BSX ) are contending in a soft CRM market. According to the company, the worldwide CRM market contracted 4% in constant currency in 2011, thereby impacting its CRM sales. The company expects the global CRM market to decline at a low single-digit bracket (in constant currency) in 2012.

Moreover, pressure on the company's ICD business has been exacerbated by the Riata defibrillator lead (a thin wire) issue. The FDA issued, in late 2011, an urgent recall of these leads given the potential risk of serious injury or patient death.

We are also cautious about the dilutive impact of acquisitions and foreign exchange headwinds. We currently have a long-term Neutral recommendation on St. Jude. The stock currently retains a short-term Zacks #4 Rank (Sell).

About Earnings Estimate Scorecard

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