By Susan Kelly
CHICAGO (Reuters) - Medtronic Inc's new chief executive, Omar Ishrak, will be pressed for details on his plan to revive the world's largest medical device maker when the company releases first-quarter results next week.
Ishrak, who took the helm in June after leading General Electric Co's Healthcare unit, may consider everything from paring back profit forecasts to divesting units, Wall Street analysts say.
His actions will serve as a response to the flagging sales and pricing pressure Medtronic has seen in its biggest markets for heart rhythm and spinal devices as healthcare providers and insurers try to rein in costs. Medical studies suggesting that some of its implants are overprescribed have also hurt sales.
"Everyone has some expectations that we get to that event and start to get some details about his thoughts on the company and where things can improve," said David Heupel, senior portfolio manager at Thrivent Investment Management.
Investors want to know what Medtronic's size and shape will look like going forward, what its focus will be, and how it will use its cash, said Heupel, who views Medtronic stock as inexpensive but lacking growth drivers. He does not own it.
"The stock for the last decade has really not done anything, and this was a firm that created a number of millionaires, from its shareholders to its employees," Heupel said. "There has been some criticism of management in the past, for the deals they've done and the hesitance to be more aggressive on expenses."
Medtronic forecast earnings of $3.43 to $3.50 per share on revenue growth of 1 to 3 percent, excluding the impact of foreign exchange, for fiscal 2012, which began in May. Some analysts believe even that modest goal is optimistic.
For the first quarter, analysts on average expect Medtronic to earn 79 cents a share, according to Thomson Reuters I/B/E/S. Company shares slumped to a year low in early August, and are off 12.5 percent this year, compared with a 5.2 percent drop for the Standard & Poor's 500 Index.
"We cannot rule out that Ishrak reduces fiscal-year 2012 guidance," said Stifel Nicolaus analyst Charles Chon.
A LONG TIME TO TURN
The selection of Ishrak to replace the retiring Bill Hawkins won praise from analysts who viewed the choice of a company outsider as a first step in improving the business.
Medtronic has stepped up the pace of acquisitions in recent years, incorporating promising technologies such as heart valves but also some underperforming products such as a treatment for fractures of the vertebrae known as kyphoplasty.
"They are rebuilding their product pipeline, but it's just such a big ship. It will take a long time to turn," said Jeff Jonas, co-portfolio manager of the Gabelli Healthcare and Wellness Trust, which does not own Medtronic shares.
Some investors and analysts would like to see Ishrak take a harder look at the expense side of the business.
Jonas believes the new CEO will accelerate cost cutting and keep a focus on international expansion.
"They've done a lot of layoffs already. They are doing plant optimization and trying to design these things to be cheaper and easier to manufacture. I think he sticks with the current plan and tries to go faster," Jonas said.
He would also prefer a more attractive dividend yield and stock buybacks. "It's something I'd like to see them be a lot more aggressive on," Jonas said.
Some analysts have also suggested Medtronic could spin off its struggling spine business, the subject of a Senate probe over accusations that doctors in its hire downplayed the risks of its Infuse bone growth drug in clinical trials. Medtronic has since announced that Yale University researchers will independently review the data.
Jonas said the spine unit may be too big to sell, and he doubts it will be spun off either.
"They are stuck with it. It's not an attractive market to buy into in a big way, and it wouldn't get a lot of respect as a stand-alone company in the market. I really think they have to ride it out," he said.
Goldman Sachs analyst David Roman is not so sure.
"Medtronic has a good collection of assets that could be managed better, from breaking up the company at one extreme to restructuring. There's lots they can do to make better use of the assets they have," Roman said.
Ishrak has a clean slate to remake the company.
"For the patient investor, there is the potential for a lot of upside here. What is absolutely critical is that he comes out and acknowledges to the public and investors that the status quo is not working," Roman said.
(Editing by Michele Gershberg and Matthew Lewis)