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Here’s Why Medtronic’s Shares Are Dropping

Inside The 2016 Consumer Electronics ShowInside The 2016 Consumer Electronics Show
Omar Ishrak, chief executive officer of Medtronic.Photo by Bloomberg Bloomberg via Getty Images

Medical device maker Medtronic (MDT) on Tuesday reported fiscal third-quarter earnings in line with expectations, but its shares fell 5% after the company said the strong dollar pressured its operating margin.

Investors are focusing on operating margin, a measure of profit, as a gauge of how well Medtronic is absorbing Covidien, which it acquired in January 2015 for nearly $50 billion.

“Right or wrong, it is the number that investors are looking at to judge the integration of Covidien, as a marker for how well the expenses are being controlled,” said Jefferies analyst Raj Denhoy.

Medtronic’s adjusted operating margin of 27.8% was slightly below expectations of 28%-to-28.5%, Denhoy said.

The company, the world’s largest stand-alone medical device maker, attributed the shortfall to foreign currency translations, particularly in Argentina, but stressed that it is on track to meet cost savings targets related to the Covidien deal.

Medtronic’s net income rose to $1.10 billion in the third quarter, ended Jan. 29, from $977 million a year earlier.

Earnings excluding one-time items were $1.06 per share, matching the number estimated by analysts on average, according to Thomson Reuters I/B/E/S.

Revenue rose to $6.93 billion, up 6% when adjusted for currency impacts and the Covidien acquisition, helped by higher sales of implanted heart rhythm devices and pacemakers.

Sales in the company’s cardiac and vascular group unit rose 8% to $2.41 billion, helped by demand for its MRI-compatible cardiac device.

Dublin-based Medtronic also reiterated its forecast for adjusted earnings of $4.36-to-$4.40 per share for the full year.

Its shares were down 5.1% at $73.50 in morning trading on the New York Stock Exchange.