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The last time I wrote about Covidien plc (NYSE:COV) I stated that I was not going to be buying any stock at the time because I didn't see anything special about it. Since the last article it popped 12.67% versus the 9.52% gain the S&P 500 (NYSEARCA:SPY) posted. It's a bit unfortunate that I didn't buy any shares, but the shares I already owned appreciated handsomely. Covidien is engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings. On November 8, 2013, the company reported fiscal fourth quarter earnings of $0.91 per share, which beat the consensus of analysts' estimates by $0.01. Since the company spun-off its pharmaceutical division back in July of 2013 the company's stock is up 18.79% excluding dividends (up 19.74% including dividends), and is beating the S&P 500, which has gained 13.84% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth buying more shares of the company right now for the healthcare sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 20, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.29 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.73), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 11.56%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 11.56%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

04Oct13

60.53

16.86

15.19

3.98

59

2.27

7.44

20Jan14

68.20

20

15.29

4.46

67

1.73

11.56

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 1.88% with a payout ratio of 38% of trailing 12-month earnings while sporting return on assets, equity and investment values of 10.3%, 21.5% and 11.9%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 1.88% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 7 years at a 5-year dividend growth rate of 12.3%. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

04Oct13

2.11

36

10.5

21.7

13.2

20Jan14

1.88

38

10.3

21.5

11.9

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock waffling around in middle-ground territory with a value of 51.07 but with downward trajectory. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is just about to cross below the red line with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($68.20), I'm looking at $69.42 to act as resistance and the simple 50-day moving average (currently $67.21) to act as support for a risk/reward ratio which plays out to be -1.45% to 1.79%.

Recent News

  1. The company declared a quarterly dividend of $0.32 per share with an ex-date of 24Jan14 and pay date of 20Feb14.
  2. The analyst at Benchmark changes estimates for the company. A "buy" rating was reiterated with a $82 price target.
  3. The company will acquire Given Imagine (GIVN). At a take-out price of $860 million, Given is a provider of ingestible cameras for diagnosing stomach problems. Covidien expects Given to add $40-50 million a quarter in revenue.

Conclusion

The market has moved considerably higher in the past year and if you want a safety play then I believe the defensiveness of Covidien is one stock to be in during the first quarter, especially since earnings season is upon on us. Fundamentally the company is fairly priced based on future earnings and on future growth potential. Financially the efficiency ratios have deteriorated a bit. Technically there seems to be some slight bearishness. I'm going to avoid pulling the trigger here and wait to see how they report. The next earnings report is scheduled for 24Jan14.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Covidien Is A Fairly Valued Dividend Stock You Should Wait On