Covidien Remains at Neutral

We have reiterated our Neutral recommendation on leading health care products maker, Covidien plc. (COV - Analyst Report), with a target price of $60.

The company’s adjusted earnings per share (from continuing operations) of $1.02 for the fourth quarter of fiscal 2012 were 2 cents above the Zacks Consensus Estimate but 6 cents lower than the year-ago quarter earnings.

Revenues decreased 3% year over year to $3,001 million, affected by the inclusion of an extra selling week in the year-ago quarter, which lowered revenues by 7% to 8%. Currency exchange rates negatively impacted quarterly revenue by 3%. However, sales were above the Zacks Consensus Estimate of $2,997 million.

Covidien is a leading global health care product manufacturing company that develops and markets medical solutions for better patient outcomes. It has a history of developing and manufacturing high-quality products in a cost-effective manner. Covidien continues to expand both organically as well as inorganically, despite a challenging Med-tech environment.

We see opportunities for multiple expansions, based on the strength and diversity of the company's business and its ability to grow on the back of strategic investments and portfolio reshaping initiatives toward high-growth/high-margin businesses. Additionally, the exit of a competitor has created opportunities for the company to gain market share in the U.S.

Further, Covidien remains committed to delivering incremental returns to its investors. The company raised its commitment to return more than 50% of its free cash flow to shareholders via dividends and share repurchases.

Covidien was on an acquisition-spree and scooped up several new companies for the diversification and development of new products/technologies. Although we believe that the company’s acquisitions will pay off in the long term, we remain cautious about the near-term dilution associated with the company’s acquisitions.

Recently, the company has been plagued by product recalls, which is affecting top-line growth. Furthermore, though we view the divestment of the Pharmaceuticals business in a positive light, we remain on the sidelines given the risks associated with the spin-off.

Moreover, we are concerned about the intense competition, reimbursement uncertainty and the sustained pricing and procedure volume pressure, which may have an unfavorable impact on the company’s core Medical Devices business. Covidien competes with Johnson & Johnson (JNJ - Analyst Report), Becton Dickinson (BDX - Analyst Report) and C.R. Bard (BCR - Analyst Report) among others. Additionally, the austerity program in Europe is affecting the entire Med-tech space.

Our long-term Neutral recommendation on Covidien carries a short-term Zacks #3 Rank (Hold rating).