Covidien Looks Strong Into the New Year
As the company continues to distance itself from its ex-parent, it could be a big winner in 2008.
A couple months ago, I wrote about the great opportunity in Covidien (COV), a manufacturer of medical products that was spun out of the Tyco (TYC) conglomerate in July. Yesterday, the company reported very healthy quarterly results as it continues to distance itself from its ex-parent, and I'm more confident than ever that this could be a big winner in 2008.
In the first report as a fully independent company, COV reported revenue rose 5% to $2.6 billion on robust sales of medical devices like laparoscopic surgery tools; equipment to diagnose and treat respiratory diseases; well as sutures, staples and other types of wound sealants.
Earnings came in at $34 million, or seven cents per share. This beat analysts' expectations, but were weighed down by restructuring expenses. That's very common with a spin-out, so I'm not worried about those. Also adding to expenses was expanded marketing initiatives aimed at building the Covidien name among medical professionals – a necessary but expensive activity. (Did you notice the Covidien sign on the outfield wall at Fenway Park during the World Series?)
Looking ahead to 2008, the company expects revenue to increase by 4% to 6%, to roughly $10.7 billion. This will be driven by sales of devices, pharmaceutical compounds, and imaging products. It is likely that Covidien will part with its retail sales segment, which manufactures generic diapers and other absorbent hygienic products, where growth prospects are fairly weak. By selling, Covidien will be able to invest in more lucrative business lines, which were largely neglected while under the Tyco corporate umbrella. Add it all up, and I'm still buying COV for a $55 target late next year.
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