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International medical technology major, Covidien plc. (COV - Analyst Report) is scheduled to release its fourth-quarter fiscal 2012 results before trading begins on Friday, November 9. Analysts polled by Zacks are currently expecting earnings per share of $1 on average for the quarter, representing an estimated year-over-year decline of 7.80%. The current corresponding Zacks Consensus Estimate for sales is $2,992 million.

For fiscal 2012, analysts polled by Zacks currently anticipate earnings per share of $4.24 on average, representing an estimated year-over-year growth of 6.90%. The current corresponding Zacks Consensus Estimate for sales is $11,842 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 fourth quarter. The company has delivered an average positive earnings surprise of 3.86% over the past four quarters, implying that it has surpassed the Zacks Consensus Estimate by that measure.

Third Quarter Revisited

Covidien’s third quarter adjusted earnings per share (from continuing operation) of $1.07 outperformed the Zacks Consensus Estimate by a penny. Profit (from continuing operation) decreased 15% year over year to $453 million, due to higher income tax-related expenses and currency fluctuations.
 
Revenues for the third quarter of 2012 grew 3% year over year to $3,007 million. However, sales were lower than the Zacks Consensus Estimate of $3,012 million. Further, currency exchange rate negatively impacted quarterly revenue by 3%.

Revenues from the larger Medical Devices segment increased 4% year over year to $2,063 million, driven by double-digit growth across Vascular and Energy Devices product lines. New products and higher volume contributed to growth.   

Revenues from Covidien’s Pharma segment remained flat year over year at $501 million. Robust gains in the Specialty Pharmaceuticals business were offset by lower Contrast Product sales.

Sales from Medical Supplies segment were virtually flat year over year at $443 million in the third quarter as higher sales of Medical Surgical and Nursing Care products were offset by lower revenues from SharpSafety and Original Equipment Manufacturing (“OEM”) offerings.  

Estimate Revisions Trend

Agreement

Estimates for the fourth quarter portray lack of action. There were no estimate revisions (out of 14 estimates) over the past week or month.

Similarly, for fiscal 2012, there were no estimate revisions (out of 17 estimates) over the last 7 and 30 days.

Magnitude

Given the relative lack of revisions, estimates for the fourth quarter and fiscal 2012 remained static over the last 7 and 30 days at $1 and $4.24 per share, respectively.

Our View

Covidien is a leading global health care products company with an impressive 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).

Covidien continues to expand both organically as well as inorganically. The company is adequately placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, strategic acquisitions, effective execution, new product cycle and expansion into emerging markets. The company is also enhancing shareholders’ value through dividends and share repurchases, leveraging healthy free cash flows and strong earnings power.

Moreover, Covidien’s recent acquisitions are in tandem with its strategy to invest in products that can offer global competitive advantage. In October, Covidien completed the acquisition of CNS Therapeutics, Inc., a St. Paul Minnesota-based specialty pharmaceutical company. The inclusion of CNS Therapeutic’s marketed products along with its solid product pipeline should boost Mallinckrodt’s pain management branded product portfolio.

However, Covidien faces stiff competition and remains exposed to pricing, utilization headwinds, along with acquisition risks. We remain concerned about the tepid U.S. health services industry and the soft European economy, which has led to fluctuating share prices. Moreover, the company has been plagued by product recalls. Also, foreign exchange translation is expected to dampen sales growth.

We expect the company to offer some visibility on the current macroeconomic trends and also provide an update about its product pipeline and acquisition synergies. We currently have a long-term ‘Neutral’ recommendation on the stock, which carries a short-term Zacks #3 Rank (Hold).

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