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Covidien Upgraded to Neutral

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On Aug 13, we upgraded medical devices company, Covidien to Neutral from Underperform based on its improved third-quarter results.

Why the Upgrade?

Covidien posted adjusted earnings per share from continuing operations of 91 cents for the third quarter of fiscal 2013 (flat year over year), which beat the Zacks Consensus Estimate by a penny. Revenues increased 3% (up 5% in constant currency) to $2,578 million but were slightly below the Zacks Consensus Estimate of $2,587 million.

Over the past four quarters, this Zacks Rank #3 (Hold) stock has delivered an average surprise of 2.18%. The Zacks Consensus Estimate for fiscal 2013 earnings has gone up 0.5% to $3.71 per share in the last 30 days. However, the same has declined by 0.7% for fiscal 2014.

We believe that improvement in the core Medical Device segment, despite a soft underlying market, has driven investor confidence. Revenues from the larger Medical Devices segment grew 4% (up 6% in constant currency) to $2,139 million in the third quarter of fiscal 2013. The division is benefiting from new products and higher volumes.

Further, the successful spin-off of its Pharma unit should help the company to focus on its high-margin surgical products portfolio and execute growth plans. Additionally, gains from acquisitions and expansion into emerging markets should propel growth.

However, the company remains exposed to pricing/volume and foreign exchange headwinds and faces stiff competition. Moreover, the medical device tax and higher investment-related expenses are likely to pressurize margins going forward.

Other Stocks to Consider

Other medical stocks such as Hanger and Alere , with a Zacks Rank #1 (Strong Buy) along with Hospira , carrying a Zacks Rank #2 (Buy), are worth considering.

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