Earnings Scorecard: Covidien - Analyst Blog

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 .

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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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