Covidien Beats on Q1 Earnings, Revs - Analyst Blog

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Covidien plc. ( COV ) posted first-quarter fiscal 2014 adjusted earnings per share from continuing operations of $1.00, up 3.09% year over year and 6 cents ahead of the Zacks Consensus Estimate. Despite facing headwinds from foreign exchange movements, the medical device excise tax and escalated investments in emerging markets, the company managed to deliver a modest positive surprise.

However, reported net income decreased 12.72% to $398 million (or 87 cents a share) from $456 million (or 96 cents) in the prior-year quarter.

Total revenues in the first quarter grew 2.80% (up 5% in constant currency) to $2,639 million, exceeding the Zacks Consensus Estimate by 1.42%. On a geographic basis, revenues in the U.S. market increased 2.99% to $1307 million. On the other hand, international revenues increased 2.62% to $1,332 million, driven by growth of 11.48% in emerging markets.

On an adjusted basis, first-quarter gross margin dropped 50 basis points (bps) to 59.4% in the quarter due to increased manufacturing costs partially offset by positive pricing along with favorable volume and mix.

Selling, general and administrative expenses scaled up 3.41% to $850 million on account of the medical device excise tax and sales and marketing initiatives in emerging markets, partially offset by improved productivity. Research and Development (R&D) expenses escalated 12.61% to $125 million in the quarter.

Adjusted operating income dropped 0.83% to $599 million. Adjusted operating margin dipped 80 bps to 22.7% in the quarter.

Segment Analysis

Revenues from the Surgical Solutions rose 5.61% (up 8% in constant currency) to $1,261 million in the quarter. It is benefiting from new product offerings and higher volumes.

Within Sugical Solutions, revenues from Advanced Surgical escalated 7.97% to $853 million, led by solid gains from vessel sealing products, stapling products and Tri-Staple reloads. Revenues from General Surgical rose by merely 0.99% to $408 million, led by improved suture sales.

Revenues from Vascular therapies grew 2.16% to $425 million (up 5% in constant currency). Within it, the revenues from Peripheral Vascular were up 1.61% to $315 million primarily due to striking growth of chronic venous insufficiency products. Revenues from Neurovascular segment were up 3.77% to $110 million, driven by increased sales of coils.

On the other hand, revenues from the Respiratory and Patient Careslipped 0.42% (up 2% in constant currency) to $953 million in the quarter. Within Respiratory and Patient Care, the Patient Monitoring business was up 3.73% to $250 million driven by increased sales of capnography products and sensors. The Airway & Ventilation was down 7.14% to $182 million.

A considerable decline in the sales of ventilators acted as a headwind. A rise in the sales of enteral feeding products accelerated revenues from Nursing Care, which was up 1.97% to $259 million. The Patient Care business was down 1.50% to $262 million as a rise in the sales of OEM products was partially offset by decline in the sales of SharpSafety products.

Share Repurchase

Covidien repurchased roughly 4.5 million ordinary shares under its share buyback program in the third quarter of fiscal 2013. Shares outstanding at the end of the quarter were $456 million.


Covidien reiterated its outlook for fiscal 2014. Covidien expects revenues to grow 2-5% year over year at constant exchange rate (CER) for fiscal 2014. The current Zacks Consensus Estimate of $10,604 million remains within the company-provided guidance range.

However, the company has updated its fiscal 2014 tax rate guidance. Covidien expects the effective tax rate for 2014 to be within 16.5% to 17.5%. The range includes the impact of foreign exchange at current rates and excludes the impact of one-time items.

Moving ahead, adjusted operating margin is likely to remain in the band of 21.5-22.5% and effective tax rate in the range of 16.0-17.0%. Moreover, Covidien is aiming a dividend payout ratio in excess of 35% over time and is targeting to achieve a ratio of at least 30% within the next 12 months.

Our Take

We are encouraged by Covidien's performance in the first quarter of fiscal 2014. The company is actively implementing its strategies of innovation, customer-focused portfolio management, emerging markets' growth and driving operational leverage.Although the company is gaining significant grounds in the emerging markets, tepid growth in the U.S. is a matter of concern.

Moreover, Covidien's bottom line remains under pressure due to escalated investments in emerging markets and headwinds from foreign exchange fluctuations. In addition, Covidien faces stiff competition and remains exposed to pricing and utilization headwinds, along with acquisition risks.

However, the company is adequately placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, strategic R&D investment, effective execution, new product cycle and expansion plans for the emerging markets. It is also consistently enhancing shareholder value through dividends and share repurchases, leveraging healthy free cash flow and strong earnings power.

Covidien currently carries a Zacks Rank #1 (Strong Buy). Other top-ranked companies like NuVasive, Inc. ( NUVA ), Cardiovascular Systems Inc. ( CSII ) and Mead Johnson Nutrition Co. ( MJN ) are also expected to do well in the medical products industry. While NuVasive and Cardiovascular Systems sport the same Zacks Rank as Covidien, Mead Johnson Nutrition Company carries a Zacks Rank #2 (Buy).

COVIDIEN PLC (COV): Free Stock Analysis Report

CARDIOVASCLR SY (CSII): Free Stock Analysis Report

MEAD JOHNSON NU (MJN): Free Stock Analysis Report

NUVASIVE INC (NUVA): 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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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