Covidien plc (COV) is set to report fourth-quarter fiscal 2014 results on Nov 5. Last quarter, Covidien’s earnings beat the Zacks Consensus Estimate by 4%. We note that on an average, Covidien has delivered a positive earnings surprise of 3.14% through the last four quarters.
Let’s see how things are shaping up prior to this announcement.
Factors at Play this Quarter
In early June, Medtronic Inc. (MDT) had announced its plans to acquire Covidien for $42.9 billion. Medtronic’s rationale behind the merger was to offset the impact of high U.S. corporate tax rate by shifting its tax base overseas, to Ireland. The acquisition is expected to close in early 2015.
We believe Covidien will continue to benefit from its expanding product pipeline, primarily driven by acquisitions in the near term. However, divestitures of the Confluent biosurgery product line and exit from the renal denervation market can hurt top-line growth.
Earnings Whispers?
Our proven model does not conclusively show that Covidien is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: Covidien currently has an earnings ESP of +2.97%. That is because the Most Accurate estimate stands at $1.04 per share, while the Zacks Consensus Estimate is pegged at $1.01.
Zacks Rank: Covidien has a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Actavis plc (ACT), with an earnings ESP of +0.32% and a Zacks Rank #1 (Strong Buy).
Henry Schein (HSIC), with an earnings ESP of +1.53% and a Zacks Rank #2 (Buy).
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