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Covidien Provides 2013 Outlook

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Covidien plc has revealed its guidance for fiscal 2013 after adjusting for the spin-off of the Pharmaceutical business, which is expected to take place at the end of third quarter of fiscal 2013. It has also provided a separate guidance for Mallinckrodt plc.

For fiscal 2013, Covidien expects net revenue to grow by 4% to 5% (earlier 5% to 8%) year over year. The company’s core Medical Devices segment is expected to be up 4%–6% (earlier 5%–8%) and the Medical Supplies business is expected to grow 1%–2% (earlier 1%–3%) year over year.

Further, adjusted operating margin (excluding one-time items) is anticipated in the range of 22.0%–22.5% (earlier 22%–23%). Effective tax rate is expected in the band of 17.0% and 17.5% (earlier 17.5% and 18.5%) for fiscal 2013. Average shares outstanding are expected between 470 million and 475 million.

Covidien has lowered its guidance due to unfavorable foreign currency fluctuations. Management believes that once the impact of the medical device tax and unfavorable foreign exchange rate is accounted into the financials after a year, Covidien will likely deliver better top-line performance and experience higher earnings growth for 2014.

In addition to the guidance, Covidien has released historical financial statements from fiscal 2010 to 2012 and the first quarter of fiscal 2013, after adjusting for the forthcoming discontinued operations.

In a separate press release, Covidien provided the first full-year guidance for Mallinckrodt, which is expected to operate as a separate, publicly traded company from mid-2013. For fiscal 2013, the Pharmaceuticals division is anticipated to grow 7%–11%, on the back of new products.

Our Take

Although adverse foreign exchange translation is likely to hamper growth at Covidien in fiscal 2013, we believe that this international healthcare major will be able to maintain its growth momentum in the long run. The company is adequately placed to achieve its long-term revenues and earnings growth targets based on its attractive fundamentals, strategic R&D investment, effective execution, new product cycle and expansion into emerging markets.

The company had announced its decision to divest this unit in Dec 2011 in an effort to focus on its high-margin surgical product portfolio. However, we are cognizant regarding the divestment-related risks associated with the spin-off.

In Jan 2013, Abbott Laboratories (ABT - Free Report) also divested its research-based pharmaceuticals business into a new company, AbbVie (ABBV - Free Report) for the same reason as Covidien. Since its inception, AbbVie’s share price increased almost 30%, which is encouraging. ABT has also performed well following the divestment, with share price increasing 18%, year-to-date.

Covidien currently carries a Zacks Rank #3 (Hold). While we remain on the sidelines regarding Covidien due to a difficult healthcare environment, medical products company, Conceptus , carrying a Zacks Rank #1 (Strong Buy), warrants a look.

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