We initiate our coverage on leading health care products maker Covidien (COV) with a Neutral rating. The company posted solid third-quarter fiscal 2011 results with both revenues and earnings outperforming the Zacks Consensus Estimates riding on solid growth in its Medical Devices business.
Revenues for the quarter soared 14% year over year as healthy double-digit growth in the Medical Devices segment more than neutralized the sustained weakness at the company’s Pharmaceuticals division.
Covidien is a leading global health care products company that develops and markets medical solutions for better patient outcomes. It has a rich 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 competes with Johnson & Johnson (JNJ), Becton Dickinson (BDX) and C.R. Bard (BCR), among others.
Covidien is expanding its footprint in emerging markets, notably in Asia and Latin America, and boosting market share in core segments through investments in sales and marketing infrastructure. Moreover, the company continues to roll out new products and technologies, focusing on faster-growing products and markets, and broadening its product range through acquisition and strategic collaborations.
The acquisition of vascular devices maker ev3 has pushed the company’s leadership up in the endovascular devices market giving it a strong foothold in both the peripheral vascular and neurovascular sub-segments.
Covidien remains committed to delivering incremental returns to investors leveraging solid free cash flows and strong earnings power. The company recently announced a restructuring program across its three business segments, aimed at boosting its cost structure. Cost savings from the restructuring should help it improve margins and profitability.
Covidien is well placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, effective execution, new product cycle, synergies of acquisitions and expansion into emerging markets. Moreover, its share buyback initiative is accretive to earnings.
However, we are concerned about intense competition, reimbursement uncertainty and the sustained pricing and procedure volume pressure, which may impinge on the performance of the company’s core Medical Devices business. Rising raw material costs also represents a headwind.
Covidien’s guidance for fiscal 2012 does not impress much, as projected sales appear to decelerate on a year-over-year basis. Moreover, the struggling Pharmaceuticals division remains an overhang for the stock.
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