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Rising earnings estimates on the back of strong fourth quarter and fiscal 2012 results helped CareFusion (CFN - Analyst Report) achieve a Zacks #1 Rank (Strong Buy) on September 11. Moreover, this global medical technology company has delivered positive earnings surprises in six of the last seven quarters with an average beat of 5.1%.  

With a decent one-year return of 17.2% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Several factors such as a strong fourth quarter, strategic initiatives to re-align its portfolio, acquisitions synergistic to product line and geographical reach as well as share buybacks and an attractive valuation are driving the stock. While the company is dogged by product recalls, it is continuously working on investing in quality systems.

CareFusion reported its fourth quarter and fiscal 2012 results on August 9, 2012. The company reported 4% year-over-year revenue growth (at constant exchange rate or CER) to gross $968 million during the quarter, surpassing the Zacks Consensus Estimate of $956 million. Revenues increased 5% in fiscal 2012 to $3.6 billion. The strength of the Medical Systems segment helped CareFusion reach the high end of its revenue guidance range of 3−5%.

Adjusted earnings per share (“EPS") from continuing operations came in at 51 cents for the fourth quarter and $1.78 for fiscal 2012, which is in the middle of the $1.75−$1.80 guidance range provided earlier.

The Medical Systems segment recorded 10% revenue growth at CER to $646 million during the quarter. Record installations of Infusion Systems and double-digit sales growth in both Respiratory Technologies and Dispensing Technologies contributed to the growth of the Medical Systems business. Procedural Solutions, however, recorded a 6% decline at CER to $322 million due to lower sales in the Specialty Disposables business arising from a difficult comparison.

The company is progressing with its sales force realignment. The newly formed surgical and vascular teams are gaining traction in their new territories thereby strengthening the company’s position.

CareFusion continued with its share repurchase program. The company repurchased 1.9 million shares for $50 million during the quarter and 3.9 million shares for $100 million during the fiscal.

Company Guidance

For fiscal 2013, CareFusion expects to report 1−3% revenue growth (at CER) resulting in adjusted EPS of $2.11−$2.21. The two segments of the company – Medical Systems and Procedural Solutions – are expected to grow at 1–3% and 0–2%, respectively.

The company is also targeting a 12−14% compounded EPS growth rate through fiscal 2015 on the back of capital allocation in the form of suitable acquisitions and share buyback programs.

Earnings Estimate Revisions

Given CareFusion’s solid performance in the fourth quarter, the Zacks Consensus Estimate for fiscal 2013 increased 9.1% to $2.16 per share based on 10 upward estimate revisions over the last 30 days. The current estimate implies year-over-year growth of 21.2%.

For fiscal 2014, 11 out of 12 estimates were revised higher over the same time frame, raising the Zacks Consensus Estimate by 7.2% to $2.37 per share, implying year-over-year growth of 9.9%.

Attractive Valuation

Valuation of CareFusion looks compelling compared to its peers by most metrics. Based on 2013 earnings estimates, the company is trading at a price-to-earnings (P/E) of 12.85x, a 16.6% discount to the peer group average of 15.41x. The price-to-book of 1.19x is at a 34.6% discount to the peer group average of 1.82x. Valuation looks attractive with respect to the price-to-sales (P/Sales) ratio as well. The P/Sales ratio of the company stood at 1.69, a 13.3% discount to the peer group average of 1.95.

About the Company

CareFusion, with market capitalization of $6.14 billion, is a global medical technology company with a portfolio encompassing IV infusion, medication and supply dispensing, respiratory care, infection prevention and surgical instruments to customers in the US and over 130 countries throughout the world. The company’s customer profile in the US includes hospitals, ambulatory surgical centers, clinics, long-term care facilities and physician offices. CareFusion, incorporated in Delaware, was spun off from Cardinal Health (CAH - Analyst Report) on August 31, 2009.

The company has grown both through the organic and the inorganic route. The latest acquisition, in June 2012, was that of U.K. Medical Limited, a leading distributor of medical products to the National Health Service and private health care sector in the United Kingdom. Earlier, in April 2012, in a strategic decision to simplify its operations, CareFusion sold its Nicolet neurodiagnostic and monitoring products business to Natus Medical (BABY - Snapshot Report) for $58 million.

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