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Health care products major Covidien plc (COV - Analyst Report) is scheduled to release its third-quarter fiscal 2012 results before trading begins on Thursday, July 26. Analysts polled by Zacks are currently looking for earnings per share of $1.06 on average for the quarter, representing an estimated year-over-year growth of 4.64%. The current corresponding Zacks Consensus Estimate for sales is $3,012 million.

With respect to earnings surprises, Covidien has consistently outperformed the Zacks Consensus Estimate in the preceding four quarters and we expect this trend to continue in the third quarter. The company has delivered an average positive earnings surprise of 5.21% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Second Quarter Revisited

Covidien’s second quarter adjusted earnings per share (from continuing operation) of $1.05 outperformed the Zacks Consensus Estimate by 2 cents. Profit (from continuing operation) increased 7% year over year on the back of healthy performance of its core Medical Devices division.
 
Revenues for the quarter rose 5% year over year to $2,946 million, beating the Zacks Consensus Estimate of $2,894 million. Currency exchange rate negatively impacted quarterly revenue by 1%. Sales benefited from market share gains, new product rollouts and strong execution.

Medical Devices sales climbed 7% year over year to $2,004 million in the quarter, led by double-digit growth across Vascular and Energy Devices product-lines with acquisitions, new products and higher volume contributing to growth.

Revenues from Covidien’s Pharma segment rose 4% to $508 million. This growth was primarily fueled by robust gains in the Specialty Pharmaceuticals and Radiopharmaceuticals businesses.

Sales from Medical Supplies segment were virtually flat year over year at $434 million in the second quarter as higher sales of medical surgical and Original Equipment Manufacturer (“OEM”) products were offset by lower revenues from SharpSafety and nursing offerings.

Estimate Revisions Trend

Agreement

Estimates for the third quarter elicit limited action. Out of the 16 analysts currently covering the stock, none have made any revision over the past week. Over the past month, 1 analyst has raised his/her estimate while 2 have made downward revisions.

For fiscal 2012, no analyst (out of 18) has raised or lowered his/her estimate over the last 7 days. However, there has been a downswing in estimates over the past 30 days with 4 analysts having chopped their forecasts with no reverse movements.

Magnitude

Given the relative lack of revision, estimates for the third quarter and fiscal 2012 remained static over the last 7 and 30 days at $1.06 and $4.30 per share, respectively. However, we remain concerned about the tepid U.S. health services industry and the soft European economy, which has led to fluctuating share prices.

Our View

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 Becton Dickinson (BDX - Analyst Report) and C.R. Bard (BCR - Analyst Report).

Covidien 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. The company is on an acquisition spree and scooped up companies like BARRX, Newport Medical Instruments, superDimension, PolyTouch Medical in 2012 alone. Recently, it completed its acquisition of Israel-based medical devices firm Oridion Systems Ltd. in late June 2012 to expand its foothold in emerging markets.

Mallinckrodt, the Pharmaceuticals business of Covidien teamed up with Horizon Pharma, Inc. (HZNP - Snapshot Report) to promote DUEXIS in the U.S in the quarter. It also agreed to co-endorse a prescription medicine called the Sumavel DosePro for Zogenix Inc. (ZGNX - Snapshot Report) in the U.S. Management at Covidien believes that the co-promotion agreements represent a key opportunity for its pharmaceuticals business as Mallinckrodt prepares to spin-off next year, as announced in December 2011.

Moreover, Covidien continues to roll out new products and technologies, focusing on faster-growing products and markets and broadening its product range through acquisitions and strategic collaborations. In May, Covidien launched two products viz. the HALO90 ULTRA Ablation Catheter in the U.S. and Europe and the Endo GIA Radial Reload aided with Tri-Staple technology. In June, the company introduced the Nellcor SpO2 in selected regions for treatment of respiratory ailments and also launched the world’s first knotless suturing device named V-Loc.

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, weakening Euro, reimbursement uncertainty and the sustained pricing and procedure volume pressure, which may weigh on the company’s results in fiscal 2012. Our Neutral recommendation on the stock carries a short-term Zacks #4 Rank (Sell).
 

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