Health care products major
Covidien plc
(
COV
) exited fiscal 2011 on a buoyant note on the heels of solid
performance of its core Medical Devices division. The Ireland-based
company's adjusted earnings per share (from continuing operation)
of $1.08 outperformed the Zacks Consensus Estimate of $1.05 and
exceeded the year-ago earnings of $0.84.
A Peek into the Fourth Quarter
Profit (from continuing operation) soared 18.5% year over year,
pow ered 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 roll outs, market share
gains and strong execution.
Medical Devices sales spurted 18% year over year to $2.09
billion in the fourth 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 t o a lower band of
17% to 18% (down from 18% and 19%).
We have discussed the quarterly results at length here:
Medical Devices Power Covidien
Agreement - Estimate Revisions
Estimate for fiscal 2012 has leaned to wards the positive side
over the past month with 8 analysts (out of 21) having hiked their
forecasts with a couple of negative revisions. A somewhat similar
trend applies to the first quarter with 6 analysts (out of 17)
raising their estimates over the last 30 days with 2 downward
movements.
The positive revisions, in part, appear to be triggered by the
lower projected tax rate for fiscal 2012 and optimism stemming from
a recove ry in the Pharma division.
Over the past week, estimate for fiscal 2012 reflects a bear ish
sentiment with 3 analysts having pruned their forecasts without any
reverse movements. For the first quarter, estimates are evenly
poised with one analyst lifting his/her forecast over the last 7
days along with a solitary downward revision.
Magnitude - Consensus Estimate Trend
Despite the upward pressure from the positive revisions,
estimate for fiscal 2012 remained static (at $4.30 a share) over
the past month. However, given the downward revisions, estimate for
fiscal 2012 has reduced by a penny over the past week. For the
first quarter, estimate (of $1.04 cents) remained unmoved over the
last 7 and 30 days.
Retaining Our Neutral Stance
Covidien is a leading global health care products company with a
history of developing and manufacturing high-quality prod ucts 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 plans to roll out several new products in fiscal 2012
including the new iDrive ultra powered stapling device (for
laparoscopic procedures), the Sonicision ultrasonic dissection
device and the Solitaire blood flow restoration device, which are
attractive revenue opportunities.
The company is also enhancing shareholder value through
dividends and share repurchases leveraging healthy free cash flows
and strong earnings power. Covidien returned $1.3 billion to its
shareholders (in the form of dividend and share repurchase) during
fiscal 2011, representing over 75% of its free cash flows, well
above its target of 25%-40%.
Covidien, in July 2011, announced a restructuring program across
its three business segments, aimed at boosting its cost structure.
Cost savings from restructuring should help offset raw material
price inflation and improve margins and profitability.
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. The sluggish U.S. and European economies
are impacting surgical volume growth.
Moreover, Covidien's guidance for fiscal 2012 does not impress
much, as projected sales appear to decelerate on a year-over-year
basis. Rising raw material costs also remain a headwind. Our
Neutral recommendation on the stock is supported by a short-term
Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years
ago that earnings estimate revisions are the most powerful force
impacting stock prices. He turned this ground breaking discovery
into two of the most celebrating stock rating systems in use
today. The Zacks Rank for stock trading in a 1 to 3 month time
horizon and the Zacks Recommendation for long-term investing (6+
months). These "Earnings Estimate Scorecard" articles help
analyze the important aspects of estimate revisions for each
stock after their quarterly earnings announcements. Learn more
about earnings estimates and our proven stock ratings at
http://www.zacks.com/education/
.
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
Zacks Investment
Research