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Health care products major Covidien plc (COV - Analyst Report) started fiscal 2012 on a positive note on the back of healthy performance of its core Medical Devices division. The Ireland-based company’s first-quarter fiscal 2012 adjusted earnings per share (from continuing operation) of $1.13 outstripped the Zacks Consensus Estimate of $1.03. Profit (from continuing operation) jumped roughly 14% year over year.

Highlights from the Quarter

Revenues rose 5% year over year to $2,898 million, missing the Zacks Consensus Estimate of $2,909 million. Covidien witnessed strong growth across its Vascular and Energy Devices businesses in the quarter.

The larger Medical Devices business posted sales of $1.98 billion, up 6% year over year, paced by double-digit growth across Vascular and Energy Devices product-lines with new products and higher volume contributing to the growth.

Revenues from the Pharmaceuticals division rose 4% fueled by strong gains in the Active Pharmaceutical Ingredients business. Revenues from the Medical Supplies segment were essentially stable year over year as higher sales of medical surgical and nursing care products were offset by lower revenues from SharpSafety and OEM products.

Covidien posted record margins in the quarter. However, the company trimmed its sales growth forecast for fiscal 2012 to reflect a more negative foreign exchange impact.

We have discussed the quarterly results at length here: Covidien EPS Tops, Snips Sales View

Agreement – Estimate Revisions

Estimates for Covidien saw little activity over the past week with no movement in either direction for both the second quarter and fiscal 2012. Over the past month, estimates have tilted towards the positive side with 8 (out of 21 analysts) having raised their forecasts for fiscal 2012 coupled with 7 downward revisions.

However, for the second quarter, estimates manifest a negative bias with 9 (out 17 analysts) downward movements and 3 positive revisions over the past month. The bearish sentiment appears to indicate the unfavorable impact of foreign exchange translation on sales.

Magnitude – Consensus Estimate Trend

Estimate for fiscal 2012 remained stationary (at $4.28 a share) over the past week and month. However, given the downward pressure from the negative revisions, estimate for the second quarter has reduced by a penny over the last 30 days.

Neutral on Covidien

Covidien is a leading global health care products company with a rich history of developing and manufacturing high-quality products 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 - Analyst Report), Becton Dickinson (BDX - Analyst Report) and C.R. Bard (BCR - Analyst Report).

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 is also enhancing shareholder value through dividends and share repurchases leveraging healthy free cash flows and strong earnings power. Moreover, the company is restructuring its three business units to boost its cost structure. Cost savings from restructuring should help offset raw material price inflation and improve margins and profitability.

Covidien, in late 2011, unveiled its plans to spin off its Pharmaceuticals business into a stand alone public company. The division had been beset by heightened generic pressure, supply issues and declining sales of branded products over the last few years.

The spin-off is expected to allow the independent entity to compete more effectively in the growing pain management market. Besides, it would foster opportunities to roll out novel products and provide flexibility to execute growth plans including expansion in the ex-U.S. markets.

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.

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 revised guidance for fiscal 2012 indicates a more unfavorable foreign exchange environment. 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 http://www.zacks.com/education/.

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