Balanced Risk-Reward for Covidien - Analyst Blog

On April 1, we have updated our research report on Covidien plc COV. We are impressed with the company's recent fiscal 2014 first quarter results but remains concerned about stiff competition and pricing and utilization headwinds in certain end markets.

Covidien posted a 3.1% rise in first-quarter fiscal 2014 adjusted earnings per share to $1.00, which beat the Zacks Consensus Estimate by 6 cents. Despite facing headwinds from foreign exchange movements, the medical device excise tax and incremental investments in emerging markets, the company managed to deliver a positive earnings surprise in the quarter.

Revenues in the quarter grew 2.8% (up 5% in constant currency) to $2,639 million, exceeding the Zacks Consensus Estimate by 1.4%. On a geographic basis, revenues in the U.S. market increased 3.0% to $1,307 million. On the other hand, international revenues increased 2.6% to $1,332 million, driven by growth of 11.5% in emerging markets.

Covidien reiterated its outlook for fiscal 2014. Covidien expects revenues to grow 2–5% year over year at constant exchange rate for fiscal 2014. Further, the company aims to achieve a dividend payout ratio in excess of 35% over time and is targeting to attain a ratio of at least 30% within the next 12 months.

Covidien is expanding its footprint in the emerging markets, notably in Eastern Europe, Middle East and Africa, Asia and Latin America, and boosting market share in core segments through investments in sales and marketing infrastructure.

Covidien's core Medical Device business overlaps with the business of its competitors like Johnson & Johnson JNJ, Becton, Dickinson and Company BDX, and CR Bard Inc. BCR. Therefore, market share gains by these competitors remain an overhang.

Currently, Covidien retains a Zacks Rank #3 (Hold).