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International healthcare products major Covidien plc (COV - Analyst Report), divulged its outlook for fiscal 2014, and highlighted some of its key initiatives to boost the company’s growth profile in 2014 and beyond at its investor meeting.

COV expects revenues to grow 2%-5% year over year at constant exchange rate (CER) for fiscal 2014. Revenues for the core Medical Devices segment (almost 80% of total revenues) is anticipated to grow in the range of 2%-5%, while the same for the smaller Medical Supplies business is likely to remain flat in the fiscal year.

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, COV is aiming a dividend payout ratio in excess of 35% over time and is targeting to achieve a payout ratio of at least 30% within the next 12 months.

Covidien outlined some growth initiatives to achieve these targets. It plans to primarily focus on product innovations, emerging markets, accretive portfolio and investment opportunities, and efficient capital allocation, along with operational leverage, to boost its future performance in a difficult Med-Tech space.

Chairman, President and CEO José E. Almeida said that the company is aggressively trying to adapt to the changing healthcare environment with new offerings under all product lines, as well as value-added services, and an evolving commercial model. The company will utilize its strong cash flow to acquire lucrative businesses, while remaining committed to return 50% of its free cash flow to shareholders via share repurchases and dividend payouts.

Our Take

Although Covidien’s long-term growth strategies appear to be promising, we remain on the sidelines given the moderate revenue and margin outlook for fiscal 2014. The company’s revenues rose 6% at CER in the last nine months of fiscal 2013 ended Jun 28, 2013.

Segment-wise, the Medical Devices segment revenues increased 7%, while the Medical Supplies revenues inched up 1%. Further, adjusted operating margin was 22.5% for the nine-month period ended Jun 28, 2013, compared with 23.7% for the year-ago period.

We had expected management to fully focus on boosting top as well as bottom line growth following the divestment of the Pharmaceutical unit. However, the outlook for fiscal 2014 appears bleak and failed to impress us. We are cognizant regarding the challenges lying ahead of COV in a stringent healthcare environment with significant end market pressures.

Following the announcement of the highlights of the investor meet, COV’s share price declined 1.5% to close at $60.45 on Friday, Sep 13. This reflects negative sentiments among investors.

The stock has a Zacks Rank #3 (Hold). Other medical products companies that warrant a look include Alere (ALR - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), and Boston Scientific (BSX - Analyst Report) and Exactech (EXAC - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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