Medtronic’s Earnings in the Shadow of Obamacare

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Affordable Care Act (ACA) – also known as Obamacare – has proven anything but to 500 Medtronic (NYSE: MDT) employees thus far who have lost their jobs as major medical device makers prepare for the coming tax in January 2013. The company is set to announce earnings on Tuesday, Nov. 20, and these results are expected to inform upon whether the additional 500 layoffs planned for 2013 will be sufficient. While industry-wide analysis suggests that the tax is unlikely to have a significant impact on companies’ bottom lines, changing corporate structures should be understood before allocating capital.

The Tax

Beginning in January 2013, medical device makers will be forced to pay a tax of 2.3% on gross sales of products. In Medtronic’s case, the company recently reported revenue of $16.2 billion, meaning that the company will be adding an extra tax bill of over $370 million to the income statement next year. Across the board, the tax is expected to generate nearly $30 billion to fund the ACA over the next decade.

Many companies have been vocally opposed to the tax for obvious reasons, warning that they would be forced to take damaging steps to protect themselves. These steps have already begun and come in the form of layoffs and the moving of various operations out of the U.S. The good news for Medtronic employees who lose their jobs is that the company that fired them will be helping to pay for the free health care they will need which cost them their jobs and healthcare in the first place. It seems that Obamacare will not only provide free healthcare to U.S. citizens, but paying jobs and healthcare for many non-U.S. citizens; the ACA may be the first global healthcare initiative of its kind.

By the Numbers

Leaving politics aside – and I acknowledge that there are many benefits to the ACA as well – Medtronic’s Tuesday announcement should inspire some caution on the part of shareholders. The company’s revenue is expected to dip to $4.05 billion and result in earnings of $0.88 per share, a year-over-year increase from the $0.84 for the same quarter last year. The company is the last of its peers to report, which provides a good indication of where the actual will end up.

St. Jude Medical (NYSE: STJ) and Johnson & Johnson (NYSE: JNJ) both beat expectations despite some revenue challenges from European operations. St. Jude saw a decrease in earnings of over 18%, but the company’s results still were ahead of estimates. In each of these cases, extrinsic events (a restructuring charge for St. Jude and an acquisition for J&J) had an impact on results.

Struggling were Baxter International (NYSE: BAX) and Boston Scientific (NYSE: BSX). The figures for Boston Scientific were particularly sour as the company saw a fall in earnings and a 7.4% decline in sales. Baxter’s management team suggested, as a part of its release, that the company’s positioning should insulate it somewhat against the tremors being felt in its European operations.

What’s Going On?

As fellow Fool, Dan Carroll, points out, the unifying explanation of these results is each company’s exposure to Europe. Using this as a yard stick, Medtronic may struggle on Tuesday, but the lull should be temporary. The more interesting takeaway from the announcement will be how the company plans to proceed through the rest of the year ahead of the tax.

The Trade

Given Medtronic’s exposure to Europe, buying the stock into earnings is not recommended. Once the company has given a clear picture of near-term plans, you should be better equipped to make a medium-term call on the stock. Overall, I like the company and its future, but am reticent to buy shares of any company just ahead of earnings without a compelling reason.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson, Medtronic, and St. Jude Medical. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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