On May 27, we downgraded medical device company,
) to Underperform based on the company's disappointing outlook
Why the Downgrade?
Estimates for Covidien have been declining ever since it reported
its guidance for fiscal 2013. For fiscal 2013, Covidien expects
net revenue to grow by 4% to 5% (earlier 5% to 8%) year over
year. The company's core Medical Devices segment is expected to
be up 4%-6% (earlier 5%-8%) and the Medical Supplies business is
expected to grow 1%-2% (earlier 1%-3%) year over year.
Management has lowered its guidance due to the unfavorable
foreign currency fluctuations. Operating margin is also expected
to remain under pressure. Additional future investment-related
expenses might further drag down the company's margins.
Moreover, the company reported soft second-quarter fiscal 2013
results on Apr 26. Net income from continuing operations (as
reported) dropped 10.2% on account of higher expenses.
Following the release of the second-quarter results and the
guidance for fiscal 2013, the Zacks Consensus Estimate for 2013
has significantly gone down 17.8% to $3.70 per share. The Zacks
Consensus Estimate for 2014 has also declined 17.1% to $4.06 per
share. With the Zacks Consensus Estimate for both 2013 and 2014
going down, the company now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
We remain on the sidelines regarding risks associated with the
divestment of the Pharmaceutical unit (Mallinckrodt) by the end
of third quarter of fiscal 2013. The Pharma business is
performing well and contributing significantly to the top line.
Following its divestment, Covidien will be left with only the
Medical Devices and Supplies businesses. Given the current
difficult healthcare environment, uncertainty looms over the
growth prospects of these two businesses.
Moreover, bad news like the termination of a contract, reactor
shutdown along with pricing pressure, raw material cost inflation
and higher debts add to our concern. Given the challenging
outlook, we fail to see any significant catalyst that could drive
the shares in the near term. As a result, the Zacks Consensus
Estimate for the third quarter has gone down 21.1% to 90 cents.
Med-Tech Stocks That Warrant a Look
While we prefer to avoid Covidien until we see signs of
improvement in the company's performance, other medical device
stocks worth a look are
). While Conceptus carries a Zacks Rank #1 (Strong Buy), the
other two stocks carry a Zacks Rank #2 (Buy).
COVIDIEN PLC (COV): Free Stock Analysis
CONCEPTUS INC (CPTS): Free Stock Analysis
MYRIAD GENETICS (MYGN): Free Stock Analysis
NEOGEN CORP (NEOG): Free Stock Analysis
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