We reiterate our Neutral recommendation on
Covidien plc.
(
COV
). The company's adjusted earnings per share (from continuing
operations) of $1.07 for the third quarter of fiscal 2012 were a
penny above the Zacks Consensus Estimate and 6 cents higher than
the year-ago quarter earnings.
Revenues increased 3% year over year to $3,007 million, led by
higher sales from the Medical Devices segment. However, sales were
lower than the Zacks Consensus Estimate of $3,012 million. Profits
from continuing operations decreased 15% to $453 million (or 93
cents a share) due to higher income tax-related expenses and
currency fluctuations.
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.
The company boasts a well-diversified product and technology
portfolio. Covidien continues to post healthy revenue growth,
despite a difficult Med-tech environment, backed by the right
business mix, new products, share gains and acquisitions.
The company remains committed to rolling out new products and
technologies, focusing on faster-growing products and markets, and
broadening its product range through acquisitions and strategic
collaborations.
New offerings such as the LigaSure Small Jaw and the Sonicision
ultrasonic dissection device are already contributing to revenues
of the Energy business. The Neurovascular business is also
benefiting from the Solitaire blood flow restoration device to
treat patients with acute ischemic stroke.
Covidien remains committed to delivering incremental returns to
its investors. Recently, the company raised its commitment to
return more than 50% of its free cash flow (earlier 25% - 40%) to
its shareholders via dividends and share repurchases. In the last
one year, the company has returned almost 80% of its free cash flow
to its shareholders (approximately $1.4 billion in cash).
In addition, Covidien is expanding its footprint in emerging
markets, notably in Asia and Latin America, and boosting market
share in core segments through investments in sales and marketing
infrastructure. The company's sales in the BRIC nations especially
China and Brazil are growing at a healthy pace. In August 2012, the
company opened a new research and development (R&D) center in
China to develop innovative medical devices to cater to the Chinese
as well as other emerging economies.
However, Covidien derives roughly 45% of its revenues from
international markets. The economic downturn along with austerity
programs in Europe is affecting the entire Medtech space. Moreover,
the strengthening U.S. dollar versus other currencies (including
the euro) may hurt the company's revenues from these markets and
subsequently its bottom line. Covidien's revised guidance for
fiscal 2012 indicates a more unfavorable foreign exchange
environment.
Recently, Covidien was on an acquisition-spree and scooped up
several new companies for diversification and development of new
products/technologies. We believe that the company's acquisitions
will pay off in the long term.
However, we remain cautious about the near-term dilution
associated with the company's acquisitions of BARRX,
superDimension, PolyTouch, Newport Medical and Oridion, among
others. The company needs to successfully integrate these
acquisitions so that they do not turn out to be wastage of
resources.
Moreover, we are concerned about 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
(
JNJ
),
Becton Dickinson
(
BDX
) and
C.R. Bard
(
BCR
) among others. Rising raw material costs can also act as a
headwind.
Our long-term Neutral recommendation on Covidien carries a
short-term Zacks #4 Rank (Sell) rating.
BARD C R INC (BCR): Free Stock Analysis Report
BECTON DICKINSO (BDX): Free Stock Analysis
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COVIDIEN PLC (COV): Free Stock Analysis Report
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