We have reiterated our Neutral recommendation on leading
health care products maker,
), with a target price of $60.
The company's adjusted earnings per share (from continuing
operations) of $1.02 for the fourth quarter of fiscal 2012 were 2
cents above the Zacks Consensus Estimate but 6 cents lower than
the year-ago quarter earnings.
Revenues decreased 3% year over year to $3,001 million, affected
by the inclusion of an extra selling week in the year-ago
quarter, which lowered revenues by 7% to 8%. Currency exchange
rates negatively impacted quarterly revenue by 3%. However, sales
were above the Zacks Consensus Estimate of $2,997 million.
Covidien is a leading global health care product manufacturing
company that develops and markets medical solutions for better
patient outcomes. It has a history of developing and
manufacturing high-quality products in a cost-effective manner.
Covidien continues to expand both organically as well as
inorganically, despite a challenging Med-tech environment.
We see opportunities for multiple expansions, based on the
strength and diversity of the company's business and its ability
to grow on the back of strategic investments and portfolio
reshaping initiatives toward high-growth/high-margin businesses.
Additionally, the exit of a competitor has created opportunities
for the company to gain market share in the U.S.
Further, Covidien remains committed to delivering incremental
returns to its investors. The company raised its commitment to
return more than 50% of its free cash flow to shareholders via
dividends and share repurchases.
Covidien was on an acquisition-spree and scooped up several new
companies for the diversification and development of new
products/technologies. Although we believe that the company's
acquisitions will pay off in the long term, we remain cautious
about the near-term dilution associated with the company's
Recently, the company has been plagued by product recalls, which
is affecting top-line growth. Furthermore, though we view the
divestment of the Pharmaceuticals business in a positive light,
we remain on the sidelines given the risks associated with the
Moreover, we are concerned about the intense competition,
reimbursement uncertainty and the sustained pricing and procedure
volume pressure, which may have an unfavorable impact on the
company's core Medical Devices business. Covidien competes with
Johnson & Johnson
) among others. Additionally, the austerity program in Europe is
affecting the entire Med-tech space.
Our long-term Neutral recommendation on Covidien carries a
short-term Zacks #3 Rank (Hold rating).
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