For most of 2012 and 2013, Covidien (NYSE:COV) was the not-so-little med-tech that could. In an environment were companies like Johnson & Johnson (NYSE:JNJ), Bard (NYSE:BCR), Stryker (NYSE:SYK), and Abbott (NYSE:ABT) were struggling to deliver sustained attractive growth in devices, Coviden managed to do so. Now, though, it looks like the Street has caught up with Covidien's prospects and the sequential deceleration in device growth could make it harder for these shares to outperform. Still, as one of the best companies in a still-popular sector, I wouldn't be in a hurry to sell if I owned shares.SEE: A Checklist For Successful Medical Technology Investment Overall Performance Continues To Lead, But Slow Spots Are AppearingWith 3% reported growth and 4% organic growth, Covidien basically hit its mark for the fiscal third quarter. While revenue from the supplies business declined 1%, core device growth was up 6% on a constant currency basis, making it one of the strongest large-cap device growth names. That said, it's not all roses for Covidien. Businesses like endomechanical (up 8%), energy (up 10%), and oximetry/monitoring (up 15%) are maintaining very healthy growth rates and gaining share, but Covidien's soft tissue and vascular businesses are looking quite a bit more ordinary (flat and up 1%, respectively, this quarter). Margins were okay, and I wouldn't read a lot into this quarter, given the split with Malliinckrodt (NYSE:MNK). Gross margin declined a point, but this was in line with expectations and due primarily due to forex. Likewise, while the 5% decline in operating income was not exactly good news, the company's performance was as expected. Opportunity Versus TimingOne of the big long-term drivers for Covidien is that the global minimally invasive surgery (MIS) market is still less than one-quarter penetrated, with likely only about one-third penetration in the U.S. Given the improvements in outcomes and total costs, I expect MIS adoption to continue to grow, with Covidien well-placed to benefit with its strong share in endomechanical and energy devices. Of course, it's never quite that simple. While MIS penetration is already above 90% in gall bladder procedures and above 85% in bariatric surgeries, Intuitive Surgical (Nasdaq:ISRG) has identified both of these as potential growth markets for its robotic surgery approach. On the other hand, markets like colorectal and hernia surgery are dramatically under-penetrated (15% to 30%), so I think Covidien will, on balance, gain more than it may lose to Intuitive. SEE: Which Is Better: Dominance Or Innovation?The one “yeah, but” to this scenario is that penetration rates change slowly. Doctors/surgeons can be surprisingly stubborn, and though the introduction of better tools from Covidien and JNJ will help, I believe this is a market where it's much more likely that there will be many years of mid-to-high single-digit growth as opposed to blockbuster years of double-digit growth. Doing Well In Oximetry/Monitoring, But Is Vascular A Cause For Concern?Covidien continues to post strong double-digit growth in its oximetry and monitoring business, and based upon the most recent reports, it looks like Covidien is gaining share from Masimo (Nasdaq:MASI) (or, alternatively, out-gaining Masimo in taking share from others). On the other hand, the vascular business has not been looking so strong. Although some of this can certainly be explained by tough comps, I do wonder if the company is losing some share to Stryker in neurovascular (embolic coils) and the likes of Abbott, JNJ, and maybe even Spectranetics (Nasdaq:SPNC) in the peripheral vascular space. The Bottom LineI have liked Covidien for some time now, and I'm not really concerned all that much by the slowing pace of device growth, nor do I think the tax deficiency notice to Tyco (NYSE:TYC) is any near-term threat to the company (though Covidien would have roughly 42% of the total liability). Rather, my concern is more that the Street has latched on to the idea that Covidien is a great med-tech story and the analysts are whipping this horse for all it's worth. I'm still looking for revenue growth around 5% over the next decade, which is more than a point higher than I see for the underlying market(s). With corresponding 7% growth in FCF, I think fair value on these shares is in the low-to-mid $60s. Relative to today's price, then, there's not all that much free money on the table (though I still think the year-to-year performance will be worthwhile). Although Covidien may not be the most attractively-priced med-tech stock today, I wouldn't be in any hurry to sell and I'd keep an eye out for a pullback as a chance to build a position. At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Orange Book

    A list of drugs that the U.S. Food and Drug Administration has ...
  5. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!