Covidien Plc (COV) recently delivered its 6th consecutive positive earnings surprise due to solid growth in medical devices and strong operating leverage. Estimates have risen higher since the earnings beat, sending the stock to a Zacks #2 Rank (Buy).
The company expects double-digit EPS growth for the long-term and plans to continue rewarding its shareholders through stock buy backs and dividends. Shares also trade at very reasonable valuations, making this stock a compelling buy.
Company Description
Covidien is a global healthcare products company. It primarily operates in three divisions: Medical Devices, Pharmaceuticals and Medical Supplies. Sales for the fourth quarter were divided as follows:
Medical Devices: 67%
Pharmaceuticals: 17%
Medical Supplies: 16%
The company derives more than 40% of its sales from outside the United States.
Fourth Quarter Results
Covidien reported its results for the fourth quarter on November 9. The company delivered earnings per share of 84 cents, an 18% increase over the same quarter in 2009. This beat the Zacks Consensus Estimate by 10 cents.
Year-over-year, net sales were up 3.1%. This growth was primarily driven by a 9% increase in the Medical Devices division. The Medical Supplies segment was essentially flat, while Pharmaceuticals declined 12%.
The gross margin expanded slightly, from 54.3% of sales to 54.9%. Meanwhile selling, general and administrative expenses fell from 35.0% of sales to 32.9%. These factors led to an impressive 41.1% increase in operating income.
Positive Outlook
Covidien has long-term goals to deliver mid-single digit sales growth and double-digit EPS growth through operational and financial leverage.
At its Investor Day in September, management gave sales guidance for 2011 of 6% to 9%, including double-digit growth in Medical Devices. The company reiterated this guidance after releasing fourth quarter results.
Management did not give specific EPS guidance, but the Zacks Consensus Estimate for 2011 is $3.55. This represents a 5% increase over 2010 EPS. The 2012 estimate is currently $3.93, corresponding to 11% EPS growth.
Returning Value to Shareholders
Covidien is very shareholder-friendly. It targets returning 25% to 40% of its free cash flow to shareholders through dividends and stock buy backs. In 2010, this number was approximately 39%.
Compare this to other medical device companies, like Stryker Corp (SYK) at 32%, or PerkinElmer (PKI) at 26%.
Covidien began paying a dividend in 2007. It currently yields 1.9%.
Attractive Valuation
Shares are trading at just 12.0x forward earnings, a significant discount to the industry average of 18.8x. It has an attractive PEG ratio of 1.1. Its price to book ratio of 2.5 is in-line with its peers.
The company is headquartered in Dublin, Ireland and has a market cap of $21.1 billion.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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