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Covidien plc (COV - Analyst Report) has moved a step further with the decision to divest its Pharmaceuticals business, Mallinckrodt. Covidien’s board of directors has given a green signal for the divestment, to be effective by end-June with the declaration of a dividend.

Shareholders will get 1 ordinary share of Malinckrodt in lieu of every 8 ordinary shares of Covidien. They will get cash in exchange of fractional shares, while no such shares of Mallinckrodt will be issued. The distribution is slated to take place on Jun 28 to shareholders of record as of Jun 19.

Following the completion of the divestment, Mllinckrodt will begin to trade independently on the New York Stock Exchange (NYSE) from Jul 1 under the ticker symbol “MNK”. Meanwhile, Covidien will continue to have the same ticker symbol “COV”.

Management believes that the spin-off will be beneficial to Covidien’s shareholders in the long term, as it will help the company focus on its high-margin surgical product portfolio.

However, we remain on the sidelines regarding risks associated with this divestment. The Pharma business is performing well and contributing significantly to the top line. Following the divestment, Covidien will be left with only the Medical Devices and Supplies businesses. Given the current difficult healthcare environment, uncertainty looms over the growth prospects of these two businesses.

Further, management has lowered its guidance due to the unfavorable foreign currency fluctuations. Operating margin is also expected to remain under pressure. Additional future investment-related expenses might further weigh on Covidien’s margins.

Moreover, the company reported soft second-quarter fiscal 2013 results on Apr 26. Net income from continuing operations (as reported) dropped 10.2% on account of higher expenses.

Following the release of the second-quarter results and the guidance for fiscal 2013, the Zacks Consensus Estimate for 2013 has significantly gone down 17.8% to $3.70 per share. The Zacks Consensus Estimate for 2014 has also declined 17.1% to $4.06 per share. With the Zacks Consensus Estimate for both 2013 and 2014 going down, the company now has a Zacks Rank #5 (Strong Sell).

While we prefer to avoid Covidien until we see signs of improvement in the company's performance, other medical device stocks worth a look are Conceptus , Neogen Corp. (NEOG - Snapshot Report) and Myriad Genetics (MYGN - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).
 

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