Earnings Preview: Covidien - Analyst Blog

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Health care products major Covidien plc ( COV ) is scheduled to release its first-quarter fiscal 2012 results before trading begins on Thursday, January 26. Analysts polled by Zacks are currently looking for earnings per share of $1.03 on an average for the quarter. The current corresponding Zacks Consensus Estimate for sales is $2,909 million.

With respect to earnings surprises, Covidien has consistently outperformed the Zacks Consensus Estimate in the preceding four quarters and we expect this impressive trend to continue into the first quarter. The company has delivered an average positive earnings surprise 7.74% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Fourth Quarter Revisited


Covidien's fourth quarter adjusted earnings per share (from continuing operation) of $1.08 outperformed the Zacks Consensus Estimate by 3 cents. Profit (from continuing operation) soared 18.5% year over year, powered by higher sales across the board with the Medical Devices business posting healthy double-digit growth.

Revenues for the quarter climbed 15% year over year to $3,078 million, beating the Zacks Consensus Estimate of $3,027 million. Sales benefited from foreign exchange tailwind and an extra selling week in the quarter, aided by new product rollouts, market share gains and strong execution.

Medical Devices sales leapt 18% year over year to $2.09 billion in the quarter, led by solid sales of Vascular and Energy Devices product-lines with acquisitions, new products and higher volume contributing to the growth.

After registering declines in the first three quarters of fiscal 2011, Covidien's Pharmaceuticals division returned to growth with revenues rising 8%, helped by favorable currency exchange translation and strong gains in the Specialty Pharmaceuticals business.

Revenues from the company's Medical Supplies segment jumped 11% riding on higher medical surgical and nursing care product sales. The company backed its financial forecasts for fiscal 2012 except the effective tax rate which has been shaved to a lower band of 17% to 18% (from 18% and 19%).

Estimate Revisions Trend

Agreement

Estimates for the first quarter elicit limited action. Out of the 16 analysts currently covering the stock, none have made any positive revision over the past week with just 1 analyst having lowered his/her forecast. Over the past month, 1 analyst has lifted his/her estimate while 2 have made downward revisions.

For fiscal 2012, just 1 analyst (out of 21) has lowered his/her estimate over the last 7 days with none moving in the opposite direction. However there has been a downswing in estimates over the past 30 days with 7 analysts having chopped their forecasts with no reverse movements.

Magnitude

Given the relative lack of revision, estimates for the first quarter and fiscal 2012 remained static (at $1.03 and $4.27, respectively) over the last 7 days. However, estimates for the quarter and fiscal 2012 have moved down by a penny over the past month.

Our View

Covidien is a leading global health care products company with a rich history of developing and manufacturing high-quality products in a cost-effective manner. The company boasts of a well diversified product and technology portfolio. Covidien's larger Medical Device unit overlaps with the business of its competitors like Johnson & Johnson ( JNJ ), Becton Dickinson ( BDX ) and C.R. Bard ( BCR ).

The company 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. Moreover, Covidien continues to roll out new products and technologies, focusing on faster-growing products and markets, and broadening its product range through acquisition and strategic collaborations.

Covidien is also enhancing shareholder value through dividends and share repurchases leveraging healthy free cash flows and strong earnings power. Moreover, the company is restructuring its three business units to boost its cost structure. Cost savings from restructuring should help offset raw material price inflation and improve margins and profitability.

In a major move, Covidien, in late 2011, unveiled its plans to spin off its Pharmaceuticals business into a stand alone public company. The spin-off, which has been contemplated for years, is subject to regulatory clearances, final approval of the company's Board and other closing conditions.

The Pharmaceuticals division had been beset by heightened generic pressure, supply issues and declining sales of branded products over the last few years. The spin-off is expected to allow the independent entity to compete more effectively in the growing pain management market. Besides, it would foster opportunities to roll out novel products and provide flexibility to execute growth plans including expansion in the ex-U.S. markets.

Covidien is well placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, effective execution, new product cycle, synergies of acquisitions and expansion into emerging markets. Moreover, its share buyback initiative is accretive to earnings.

However, we are concerned about intense competition, reimbursement uncertainty and the sustained pricing and procedure volume pressure, which may weigh on the company's Medical Devices business in fiscal 2012. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).


 
BARD C R INC ( BCR ): Free Stock Analysis Report
 
BECTON DICKINSO ( BDX ): Free Stock Analysis Report
 
COVIDIEN PLC ( COV ): Free Stock Analysis Report
 
JOHNSON & JOHNS ( JNJ ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BCR , BDX , COV , JNJ

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