In the wake of its dismal fiscal 2013 second quarter results,
), the $30 billion medical products maker, slashed earnings
estimates for both this year and next by 17% each.
Not only did net income decline by 10.2% due to higher expenses,
the company also warned about future investment-related expenses
due to Japanese yen fluctuations that would further drag down their
Plus, they are in the process of selling their Pharmaceuticals
division, which is profitable and will create more uncertain
expenses during the divestiture process this month.
Here's a visual of the dramatic drop in analysts estimates since
the company's April 26 report, after which it slipped to a Zacks #5
Rank (Strong Sell)...
Regulation, Tax, and Cost Headwinds
The medical-technology excise tax of 2.3% has started to weigh on
the bottom line from the second quarter of fiscal 2013. The tax
will be a part of the SG&A expense and is expected to be
approximately $25 million per quarter.
Moreover, increased investment-related expenses related to emerging
markets growth is likely to keep margins under pressure going
forward. The company's net income from continuing operations
dropped 10.2% in the second quarter of fiscal 2013 due to higher
expenses, which dampened solid sales growth.
Covidien is slated to spin-off its Pharmaceutical unit at the end
of Jun 2013. The Pharma business is performing well on the back of
new products and is contributing significantly to the top line.
Following its divestment, Covidien will be left with only the
Medical Devices and Supplies businesses.
Although the divestment will allow the company to focus on
high-margin surgical products, uncertainty looms over the growth
prospects of these two businesses, given the current difficult
Path of Least Resistance
At $64, COV is trading about $2 below where it was when it earned a
Zacks #5 Rank on May 9. After a gap lower to $62 in the aftermath
of its last quarterly report, the stock climbed back above $66 but
has met steady selling pressure there.
And the whole Medical Products industry group is under pressure
with a Zacks Industry Rank of 171 out of 265 industries, with 72
companies including competitor
Trading over 17 times forward estimates, COV looks poised to at
least test the $61-62 support area if not lower into the high $50s.
Until the earnings estimate story turns around, this one should be
hands off for a while.
Kevin Cook is a Senior Stock Strategist with
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