Covidien Earnings Beat by a Penny - Analyst Blog

Covidien plc COV posted a 3.2% rise in fiscal 2014-second quarter adjusted earnings per share to 96 cents from 93 cents a year ago, beating the Zacks Consensus Estimate by a penny. The marginal rise in earnings was attributable to adverse impacts from foreign exchange movements and the medical device excise tax. Net earnings, however, fell 2.2% to $435 million from $445 million due to decrease in weighted average shares outstanding.

Total revenues in the first quarter grew 2.7% to $2,598 million, missing the Zacks Consensus Estimate of $2,610 million. On a geographic basis, revenues in the U.S. market increased 1.6% to $1,277 million. On the other hand, revenues from non-U.S. developed markets rose 1.8% to $938 million and from emerging markets went up 8.8% to $383 million.

On an adjusted basis, gross profits slid 0.4% to $1,523 million, while gross margin fell 180 basis points (bps) to 58.6% in the quarter due to unfavorable foreign exchange movements.

Adjusted selling, general and administrative expenses, as a percent of sales, fell 110 bps in the quarter. Research and Development (R&D) expenses escalated 10.7% to $135 million in the quarter, representing 5.2% of sales, up 40 bps from the fiscal 2013-second quarter.

Adjusted operating earnings dropped 1.9% to $560 million. Adjusted operating margin dipped 100 bps to 21.6% in the quarter.

Segment Results

Revenues from the Surgical Solutions rose 4.0% (but down 2% in constant currency) to $1,213 million in the quarter. Sales in Advanced Surgical increased, driven by double-digit rise in vessel sealing and solid growth for stapling. Sales of Advanced Surgical were driven by the acquisition of Given Imaging. In General Surgical, operational sales declined slightly from the year-ago level, due to the sale of the Confluent bio-surgery product line in Jan 2014.

Revenues from Vascular Therapies inched up 0.7% to $409 million (but down 1% in constant currency). Sales in Peripheral Vascular increased driven by better sales of compression products. However, Neurovascular sales were flat year-over-year, as higher growth in the U.S. was offset by competitive pressure in the European market, the timing of customer orders in emerging markets and a recent voluntary product recall.

Revenues from the Respiratory and Patient Care rose 1.9% (down 1% in constant currency) to $976 million in the quarter. Sales from Patient Monitoring sales rose modestly driven by higher sales of capnography products. Sales in Airway & Ventilation grew slightly, as moderate increase in sales of ventilators more than offset the decrease in sales of airway products.

In Nursing Care, sales were higher, primarily due to increases in sales of incontinence and enteral feeding products. Patient Care sales moderately rose from the prior year, led by an increase in sales of SharpSafety products on the back of favorable pricing and a competitive shortage of pre-filled syringes.

Share Repurchase

Covidien repurchased roughly 1.2 million shares under its previously announced share buyback program. With this, the company has returned over $2.0 billion to shareholders over the last twelve months through share repurchases and dividends.

Guidance

Covidien reiterated its outlook for fiscal 2014. Previously, Covidien had revealed that it expects revenues to grow 2–5% year over year at constant exchange rate (CER) for fiscal 2014.
 
However, the company had updated its fiscal 2014 tax rate guidance. Covidien expects the effective tax rate for 2014 to be within 16.5 to 17.5%. The range included the impact of foreign exchange at current rates and excluded the impact of one-time items.

Adjusted operating margin is likely to remain in the band of 21.5–22.5% while effective tax rate is expected in the range of 16.0–17.0%. Moreover, Covidien is aiming a dividend payout ratio in excess of 35% over time and is targeting to achieve a ratio of at least 30%.

Zacks Rank

Covidien currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical products industry include Enzymotec Ltd. ENZY, St. Jude Medical Inc. STJ, and William Demant Holding A/S (WILYY). Enzymotec sports a Zacks Rank #1 (Strong Buy), while both St. Jude Medical and William Demant Holding retain a Zacks Rank #2 (Buy).