Potential FDA Warning and Earnings Overshadow STJ Share Repurchase Program

Shares of St. Jude Medical (NYSE:STJ) opened 6% lower Wednesday morning following the company’s quarterly report and conference call, which included discussion of a potential FDA warning letter for one of STJ’s manufacturing facilities. CEO Dan Starks said on the conference call that the FDA is inspecting a California plant that manufactures pace-makers and defibrillators, and the inspection may result in a warning. After an inspection, the FDA will issue Form 483 discussing their findings within the plant, however the form does not constitute a final decision on violations and is not a formal warning letter. Management guidance was less than optimistic about the outcome of the inspection, and we wonder if management is already aware of violations in the facility. Starks advised analysts and investors not to be shocked if the risk is realized.

STJ reported lackluster third quarter sales and earnings, with a 4% decrease in revenue, $1.383B to $1.326B, from 3Q11, exacerbated by currency exchanges. Net earnings fell by 22% year-over-year to $176M, and EPS came in at $0.56, or $0.83 excluding one-time expenses. Consensus estimates for earnings and revenue were $0.81 per share and $1.43B, constituting a slight beat in earnings and a miss in revenue expectations.  The company did, however, announce a $300M stock repurchase program which may lend some support to the flagging stock. Management expressed optimism for 2013, citing emerging growth drivers to be launched next year, but the threat of an FDA warning letter will create overhang in the stock until concerns are dispelled. Analysts have been lowering full-year earnings expectations, and the average estimate is now $3.43 per share, down from $3.47 just a few months ago.