Tickers in this Article: COV, BSX, SYK, AGN, MASI, BCR, KCI
By and large, if an investor finds a dollar bill selling for close to 50 cents on Wall Street, it is a safe bet that it really is not a dollar bill after all. But every once in a while there are good values hiding in plain sight, and diversified medical products company Covidien (NYSE:COV) might be one of those.

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A Respectable Quarter in a Tough Market
Nobody expected a break-out quarter from Covidien, and the company did not produce one. Nevertheless, constant-currency revenue growth of 4% and organic growth of about 1.5% was a bit better than expectation. Devices did well, up 10% on strength in markets like oximetry while the newly-acquired ev3 business seems to be fitting in well. The specialty pharmaceutical and imaging business was weak (as expected), with sales down 11% overall and down 15% in specialty pharmaceuticals. Medical supply sales were up 1%, but this is a relatively non-influential business for Covidien. (For more, see A Checklist Of Successful Medical Technology Investment.)

Profitability was also alright for this fiscal fourth quarter. Gross margin rose almost two full points, though operating income growth basically matched revenue at 4%. Some of the company's operating leverage was vacuumed up by an 18% increase in R&D spending - hardly something that long-term investors should mind.

A Brighter Road Ahead?
In contrast to ongoing pessimism in the healthcare space, Covidien management seemed pretty confident that they have seen signs of stabilization in the market. Investors would do well to remember, though, what stabilization means. It means things have stopped getting worse and may rebound, not that things are going to be back to normal in a quarter or two.

Longer term, though, there is plenty to like about this business. Covidien management has been busy this year on the M&A and divestiture front. It does not seem like the market appreciates how the company has moved away from low-growth businesses - some of which carried the added burden of reimbursement pressures - to more dynamic growth opportunities like neurovascular intervention. (For more, see Coviden's Still Hungry.)

With three of the major neurovascular franchises now in new hands - including Boston Scientific's (NYSE:BSX) recent sale to Stryker (NYSE:SYK) - a strong bariatric surgery business that targets the market more comprehensively than Allergan (NYSE:AGN), a strong hernia franchise and a good oximetry business, Covidien should be able to post ongoing growth here. And while the company's pharmaceutical business is very much weighted toward pain management (83% of its sales are in narcotics, with 55% from well-known drugs like Vicodin, Percocet, and Oxycondone), pain is not a market in decline.

The Bottom Line
Certainly nothing is guaranteed to Covidien. Bard (NYSE:BCR) and Kinetic Concepts (NYSE:KCI) want to grow their hernia businesses and Masimo (Nasdaq:MASI) is making inroads in patient monitoring (though there is a licensing deal in place with Covidien). Nevertheless, Covidien seems to be holding its own at a bare minimum, and even taking share in some cases.

Investors still appear to have time to profit from Wall Street's disinterest in this name. The current stock price is fair only if the company basically never grows again. So if investors feel comfortable projecting even modest growth for this company, the stock may well prove to be an outperformer as the market wakes up to a nascent healthcare recovery. (For more, see Investing In Medical Equipment Companies.)

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