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Tickers in this Article: BSX, MDT, STJ
Recently, medical devices major - Medtronic, Inc. (MDT) provided an update on its fiscal 2013 earnings per share (EPS) guidance. The company, in an investors' presentation, stated that it has increased the lower end of its earlier provided EPS guidance by 4 cents, enthused by the renewal of a tax credit. Accordingly, now the EPS for the said fiscal is expected to remain in the band of $3.66-$3.70 (earlier range being $3.62-$3.70) indicating annualized earnings growth of 6%-7% a share (earlier rate of growth range being 5%-7%). The current Zacks Consensus Estimate of $3.66 per share stays at the lower end of the guided range. Medtronic stated that the narrowing of its bottom-line forecast was on the back of favorable impact from the recent renewal of the U.S. Research and Development (R&D) tax credit. As per the company's estimates, the tax credit will boost the fiscal 2013 net income by $30-$35 million or 4 cents per share. Among these, 3 cents are expected to be realized in the coming quarter with the remaining in the next. We note that the Zacks Consensus EPS Estimates for the third and fourth quarters 2013 are 90 cents and $1.03, respectively. Medronic is slated to release its third-quarter fiscal 2013 results, ending January 31, 2013, on February 19, 2013.

In the last earnings call, the company, while discussing the outlook for the current fiscal, stated that the uncertainties surrounding the final IRS or Internal Revenue Service implementation guidelines of the U.S. medical device tax as well as the renewal of the U.S. R&D tax credit forced Medtronic to take a conservative stance.

Notably, on December 5, 2012, IRS released the final rules for the long discussed medical device excise tax, which stands effective after December 31, 2012. According to this, a 2.3% excise tax is payable on the sales of certain medical device products ranging from surgical sutures to knee replacement implants. We believe, this additional tax burden will throttle innovation as it will impact investment in R&D. The other leading medical devices companies like Boston Scientific (BSX) and St. Jude Medical (STJ) are also expected to act alike.

Currently, we prefer to remain on the sidelines until more visibility is obtained in this regard. We have a long-term 'Neutral' recommendation on Medtronic, which carries a short-term Zacks #3 Rank (Hold).

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