Recently, Covidien witnessed a significant decline of nearly 7% after it announced sluggish second-quarter earnings. Even after the drop, Covidien’s share price has gained more than 7.3% since the beginning of the year. The company is currently in the portfolios of several famous investors including Ray Dalio, Steven Cohen, and Paul Tudor Jones. Should we consider a recent drop in its share price as an investment opportunity?
Covidien is a global leader in the development and manufacturing of healthcare products for hospitals, alternate site facilities, and surgi-centers in more than 140 countries. Covidien operates in three main business segments: Medical Devices, Pharmaceuticals, and Medical Supplies.
The majority of its revenue, $8.11 billion, or 68.4% of total 2012 revenue, was generated from the Medical Devices segment. The Pharmaceuticals segment ranked second with $2 billion in sales, while the Medical Supplies segment contributed only $1.74 billion in revenue in 2012. Interestingly, the Medical Devices segment has the highest operating margin of 30.8%. It is also the biggest profit contributor with nearly $2.5 billion in operating income.
Sluggish second quarter
In the second quarter, Covidien generated $3.1 billion in net sales, slightly higher than the net sales of $2.95 billion in the year-ago period. However, net income came in at $439 million, an 11.6% year-over-year decline compared to the same period last year. The drop in net income was due to the increase in research and development expenses, as well as a rise in restructuring charges.
During the quarter, the company bought back around 3.2 million ordinary shares, reducing the total number of outstanding shares to 476 million. Covidien is trading around $62 per share with a total market cap of nearly $29.3 billion. The market values Covidien at around 10.8 times EV/EBITDA.
Compared to its peers Becton, Dickinson and Company and C.R. Bard , Covidien has a higher valuation. Becton Dickinson is a global developer and manufacturer of medical devices, instrument systems, and reagents for life science researchers, clinical laboratories, and healthcare institutions, operating in three main business segments: BD Medical, BD Diagnostics, and BD Biosciences.
Recently, Becton Dickinson’s subsidiary, Becton Dickinson Rx, announced that it has received FDA approval for the second drug offered in the BD Simplist line of ready-to-administer prefilled generic injectable. The BD Simplist helps clinicians to reduce the number of steps in a traditional vial and syringe injection sequence from 20 steps to only 12 steps.
Thus, it would help reduce potential medication error. In the next few years, the company intends to launch around 20-30 drugs in the BD Simplist product line. Becton Dickinson is trading around $95 per share with a total market cap of $18.4 billion. The market values it a bit higher than Covidien at 9.5 times EV/EBITDA.
C.R. Bard, founded in 1907, is the manufacturer and seller of medical, surgical, diagnostic, and patient care devices to hospitals, individual healthcare professionals, and alternate site facilities. C.R. Bard generated most of its revenue from four main product categories including Vascular (29% of the total net sales), Urology (26%), Oncology (27%), and Surgical Specialties (15%).
Recently, C.R. Bard reported the first-quarter 2013 earnings of $1.44 per share, beating the consensus estimate by only one penny. However, its net income came in at $90.7 million, or $1.08 per share, 35% lower than the same period last year. The decline in its net income was due to impairment charges of $5.7 million and litigation expenses of $25.8 million.
C.R. Bard is trading around $96 per share, with a total market cap of more than $8.1 billion. C.R. Bard has a similar valuation to Becton Dickinson at 9.25 times EV/EBITDA. Interestingly, C.R. Bard has the highest operating margin of 26.4% while the operating margins of Becton Dickinson and Covidien are 20.8% and 21.7%, respectively. Among the three, Becton Dickinson pays the highest dividend yield of 2.1%. Covidien ranked second with a dividend yield of 1.6% while the dividend yield of C.R. Bard is the lowest, at only 0.8%.
My Foolish take
Covidien does not trade at a bargain price with low valuation. Moreover, the dividend yield seems to be quite low at only 1.6%. Personally, I would rather wait for a further decline in price before initiating a long position in this healthcare stock.
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