I like the health care sector. Alot .
There is always a need for quality medicine and medical care,
no matter how theeconomy is doing. And they hold defensivestocks
that can weather ups and downs nicely.
As populations age in developed countries, health carewill
gain in importance. And asemerging markets adopt modern medical
practices, the use of low-cost, high-volume health care products
will ramp up. The sector could face unprecedented demand.
In the health-care sector, one of my favorites is
Covidien PLC (
. Of the 87 firms in the advanced medical equipment industry, it
is among the 11 companies that pay adividend .
The company develops, makes and sells medical devices,
pharmaceuticals and medical supplies. Here are a few reasons why
I love this stock:
1. Exciting products
Covidien has launched some great products: For example, the
Sonicision, introduced in 2012, is an ultrasonic dissection
device for surgical procedures.
Covidien has been expanding its product line through
acquisitions and strategic collaborations. One successful launch
has been the ADHD medication Concerta, which is expected to
generate about $100 million insales thisyear . This product
received U.S. Food and Drug Administration (FDA) approval in
2. Robust growth
Covidien's steadyacquisition of companies has delivered solid
growth in recent years.
In 2012, it acquired Maya Medical, Newport Corp., BARRX
Medical, SuperDimension, Oridion Systems and MindFrame Inc. to
expand its medical devices portfolio. It acquired CNS
Therapeutics last year to expand its branded pharmaceuticals
portfolio. The company also acquired CV Ingenuity to build its
vascular segment. Collaborative and promotion agreements have
also been signed.
3. Expected growth
As an example, Covidien is launching a study on bariatric
procedures for treating Type 2 diabetes in patients with a body
massindex less than 35, potentially affecting 5 million
4. Expanding markets
Emerging marketsoffer a sizable and rather underpenetrated
marketplace for the company.
Covidien is launching products in various emerging markets,
notably in Asia and Latin America. The company's sales in the
BRIC nations -- especially China and Brazil -- are growing at a
healthy pace. It plans to double its current $1 billion inrevenue
from emerging markets in the next five years, positioning it as a
top medical instruments player in thatmarket .
Take a look at thestock 's recent success since the beginning
On Jan. 25, Covidien reported adjustedearnings per share of
$1.10 for the first quarter of fiscal 2013, 3 cents lower than
the same period the previous year. Itsnet income was flat
year-over-year at $493 million ($1.03 per share) due to higher
expenses, which dampened otherwise solid sales growth.
First-quarter revenue increased 5% year-over-year to $3 billion,
driven mainly by higher sales in the medical devices
segment.Gross margin was down slightly in the 2012 fourth quarter
-- from 58.8%year over year to 57.5% -- mainly due to
The stock isundervalued . With a current price of $67.84, the
stock should be trading for at least $75 per share -- compare its
forward price-to-earnings (P/E ) ratio of 13.1 with the industry
average of 25.2. Additionally, its operatingearnings yield of
6.3% ranks higher than two-thirds of all stocks.
Covidien should see solid growth during the next three to five
years. Its core device business should grow on average by at
least 5% to 6% for the next five years. This should be fueled by
its energy-based vascular devices, which can be expected to
experience annual growth in the 10% to 12% range.
The stock has great momentum. On March 28, the stock closed at
$67.84, which was just 0.2% below its52-week high and 35% above
its52-week low .Shares are trading 6.3% above their50-day moving
average of $63.80, as well as 16.1% above their200-day moving
average of $58.41.
Covidien also has a healthybalance sheet and pays a solid
dividend of 1.4%. Additionally, it buys back shares. Given its
strongcash flow from operations, it should be able to maintain
its currentcash position, allowing it to grow through
Risks to consider:
Strong competitors like
Johnson & Johnson (
and Applied Medical have cut intomarket share in its soft tissue,
endomechanical and commoditized trocar product line. With the
changing regulatory environment in the United States, R&D
costs are expected to increase substantially to meet more
stringent approval requirements.
Action to take -->
Covidien is a good buy up to $75 a share. My 12- to 18-monthprice
target is $100, representing a 30% rise from its current price.
With a current dividend of 1.4%, this stock provides a great
combination of growth and income.