Medical supply and device firm Covidien (NYSE:COV) reported second quarter results late in April 2012 and modest sales growth. It hopes that by spinning off a stodgier division to investors it will be able to boost its total growth trends going forward, and this could help it bridge its current valuation discount with a number of purer-play rivals.

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First Quarter Recap
Net sales advanced 5% and reached nearly $3 billion. Medical device (instruments, soft tissue repair products, airway and ventilation devices) sales increased 7% to $2 billion, or two thirds of the total top line. United States growth of 8% exceeded international growth, which grew 7%. Pharmaceutical sales (specialty pharmaceutical drugs and ingredients) were the next largest category and grew 5% to make up just over 17% of the top line. U.S. growth of 6% again exceeded international growth of 2%. The remaining segment is medical supplies (nursing, medical care products), which was flat and accounted for the remaining roughly 15% of total sales.

Lower product costs and restructuring charges helped send operating income up 7% to almost $1.3 billion. This represented a healthy operating margin of 21.3% of total sales. A drop in tax expenses further boosted net income to $991 million for growth of 12.4% from last year's first quarter. Earnings rose 15.3% to $2.04, due to share buybacks.

SEE: A Breakdown Of Stock Buybacks

Outlook and Valuation
Analysts project full year 2012 sales of nearly 3% and total sales of $11.9 billion. The consensus earnings projection currently stands at $4.30 per share and would represent annual growth above 31%. At the current share price of $56, the forward P/E is 12. This is slightly below Becton Dickinson's (NYSE:BDX) forward P/E of 12.5 and C.R. Bard's (NYSE:BCR) multiple of 14.

The Bottom Line
Since its spinoff from Tyco (NYSE:TYC) in 2007, Covidien has managed to boost sales 30% and profits at a similar level after posting a loss the year it was spun out. Since that time, its stock is up around 20% to lead the pack, along with Bard. It also beats the overall market return, which is roughly down 10%.

Despite these decent trends, management has chosen to shake things up and will be spinning off the pharmaceutical unit to investors in yet another spinoff. The announcement was made on Dec. 15, 2011 when pharma was estimated to log $2 billion in annual sales. It will be a top 10 player in the generic drug space and is also a large producer of bulk acetaminophen that is used in pain medication. It should free up Covidien to focus on growing its medical businesses and leave pharma to compete in the drug space along with larger rival Teva Pharmaceutical (Nasdaq:TEVA).

SEE: 5 Must-Have Metrics For Value Investors

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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