The fourth reason why Covidien can generate growth relates to the kind of procedures that its equipment serves. Previously, management has outlined that bariatric (weight-loss) procedures are one of its most important profit drivers. Frankly, with more than one-third of U.S. adults obese, the demand for bariatric surgery isn’t going away anytime soon.
Finally, spinning off Mallinckrodt will allow Covidien to focus on investing as a pure medical device company. This is likely to mean more acquisitions, and a heavy focus on emerging markets. It should also enable the company to cut some corporate costs. Indeed, management outlined programs designed to trim around $400 million from its budget.
Investors should look out for more disclosure in the upcoming investor day event in September. Covidien’s management is very good at this sort of thing. For example, despite a string of acquisitions, it managed to reduce headcount by around 5% over the last four years.
Where next for Covidien?
In conclusion, this was a pretty strong quarter for Covidien. Unlike Johnson & Johnson (NYSE:JNJ) and General Electric Company (NYSE:GE), it managed to generate some good growth from medical device sales, despite a sluggish hospital spending environment. In the long-term its growth prospects look assured, and the stock is one of the most attractive in its sector. In the near term, it has managed to get over a tricky quarter in its vascular business, and there is likely to be some upside to come from its cost-cutting initiatives.
Analyst estimates call for $4.04 in EPS for 2014, which puts the stock on a forward valuation of around 15.8 times earnings. If you are happy to pay this valuation for a company with solid 4% to 6% revenue growth prospects, and earnings growth forecast in the high-single-digits, go ahead and buy the stock.
In my view, it looks fairly valued for now, but I wouldn’t bet against management’s ability to generate future cost savings and margin expansion. With this in mind, it’s well worth closely following what the management says in its investor day presentation in September.
The article 5 Reasons This Stock Can Surpass Its Sector originally appeared on Fool.com and is written by Lee Samaha.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Covidien and Johnson & Johnson. The Motley Fool owns shares of General Electric Company and Johnson & Johnson. Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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