Covidien Issues FY13 Guidance

At a recent investor’s meet, leading health care products company, Covidien plc. ( COV - Analyst Report ) provided its guidance for fiscal 2013 and disclosed future strategies to drive long-term growth. José (Joe) E. Almeida, the Chairman, President and CEO of Covidien, discussed upcoming product pipelines and latest achievements of the company.

The Chairman said that the company is performing consistently in fiscal 2012, despite the current macroeconomic challenges in the medical devices sector. He also added that the company will return half of its free cash flow to stakeholders via share repurchases and dividends and utilize the rest for business expansion. Moreover, the previously announced Pharma spin-off process is progressing smoothly and is expected to be complete by mid 2013.

For fiscal 2013, Covidien expects net revenues to grow by 3% to 6% year over year. The company’s core Medical Devices segment is expected to be up 4%—7%. The Pharmaceuticals division is anticipated to grow 1% to 4%, while the Medical Supplies business is expected to remain flat year over year. All of the above mentioned growth rates are based on current foreign exchange rates.

The guidance provided for fiscal 2013 is in line with our expectations, reflecting the company’s successful performance based on product innovations and successful penetration into key emerging markets.

Additionally, management forecasts adjusted operating margin in the range of 22% to 23% and effective tax rate in the band of 18% and 19% for fiscal 2013. This implies that the company does not expect adjusted operating margin to improve year over year, as it is the same for fiscal 2012, while the effective tax rate is anticipated to increase marginally.

Covidien is a leading developer, manufacturer and distributor of medical devices and services on a global scale. Its business segments overlap with the business of its competitors such as Becton, Dickinson and Company ( BDX - Analyst Report ) , Johnson and Johnson ( JNJ - Analyst Report ) and CR Bard Inc. ( BCR - Analyst Report ) among others.

Covidien remains committed to rolling out new products and technologies, focusing on emerging markets, and boosting market share in core segments through investments in sales and marketing infrastructure. Management expects that a focus on product innovation, aggressive portfolio management and optimal spending on future investments will yield positive results in the long run.

However, sustained pricing/procedure volume pressure, fluctuating foreign exchange rates, a sluggish U.S. and European economy represent major headwinds. We currently have a Neutral recommendation on Covidien, which carries a short-term Zacks #4 Rank (Sell rating).