Covidien's Earnings Increase 4% Year Over Year, But Is It A Buy?

Jan.25.14 | About: Medtronic plc (MDT)

Covidien plc (COV) is engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings. The company reported earnings before the market opened on 24Jan14 and on the surface everything looked good with the company reporting fiscal first quarter earnings of $1.00 per share (beating analysts' estimates by $0.06) on revenue of $2.64 billion (beating analysts' estimates by $30 million). What I'd like to at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Product Line Sales (millions)

1FQ14

1FQ13

Y/Y

Surgical Solutions

$ 1,261

$ 1,194

6%

Advanced Surgical

$ 853

$ 790

8%

General Surgical

$ 408

$ 404

1%

Vascular Therapies

$ 425

$ 416

2%

Peripheral Vascular

$ 315

$ 310

2%

Neurovascular

$ 110

$ 106

4%

Respiratory and Patient Care

$ 953

$ 957

0%

Patient Monitoring

$ 250

$ 241

4%

Airway & Ventilation

$ 182

$ 196

-7%

Nursing Care

$ 259

$ 254

2%

Patient Care

$ 262

$ 266

-2%

Total Sales

$ 2,639

$ 2,567

3%

Click to enlarge

Compared to last year total revenue has increased by 3%. There isn't much to highlight that is eye-popping in this portion of the earnings report. Surgical Solutions increased by 6% from the prior year while Vascular Therapies increased 2% and Respiratory & Patient Care had a negligible move.

Income Statement

Income Statement

1FQ14

1FQ13

Y/Y

Net Sales

$ 2,639

$ 2,567

3%

Cost of goods sold

$ 1,076

$ 1,030

4%

Gross Profit

$ 1,563

$ 1,537

2%

Selling, general and administrative expenses

$ 850

$ 822

3%

R&D expenses

$ 125

$ 111

13%

Restructuring charges, net

$ 57

$ 8

613%

Operating Income

$ 531

$ 596

-11%

Interest expense

$ (53)

$ (51)

4%

Interest income

$ 2

$ 3

-33%

Other income

$ 33

$ 1

3200%

Income from continuing operations before taxes

$ 513

$ 549

-7%

Income tax expense

$ 115

$ 93

24%

Income from continuing operations

$ 398

$ 456

-13%

Income from discontinued operations, net of income taxes

$ -

$ -

-

Net Income

$ 398

$ 456

-13%

Non-GAAP restructuring charges

$ 22

$ 2

1000%

Non-GAAP Impact of tax share charges

$ 49

$ -

-

Non-GAAP Agreement

$ (28)

$ -

-

Non-GAAP tax matters

$ 15

$ 2

650%

Avg. basic shares outstanding

452

472

-4%

Avg. diluted shares outstanding

456

477

-4%

Non-GAAP Basic Earnings per share

$ 1.01

$ 0.97

4%

Non-GAAP Diluted Earnings per share

$ 1.00

$ 0.96

4%

Click to enlarge

On the income statement everything seems pretty pedestrian to me. Gross profit increased 2% from the prior year. Research and Development expenses increased 13% year over year and this is a trend I definitely love to see in a medical device company because it shows they are investing in their future for more organic growth. Restructuring costs however did increase an astounding 613% which caused total operating income to decrease 10% on its own to a total operating income decrease of 11%. Interest income declined 33% and other income increased 3200% which helped stem the decrease for income from continuing operations before taxes to a drop of 7%. Taxes however increased 24% making income after taxes from continuing operations drop 13%. Now, what really helped the company with the earnings beat was they reported several non-GAAP items which helped their income quite a bit. Coupled with a 4% reduction in outstanding share count, non-GAAP earnings were a 4% increase from the prior year which I believe to be pretty good.

Conclusion

The company reported earnings which were 4% higher than a year before on 3% more revenue while the share price was up 11.48% in the past year excluding dividends. The share count has decreased 4% for the entire year. I definitely love that both earnings per share and revenue were up year over year. On a fundamental basis, this company is fairly valued with respect to 2014 earnings. The company reported decent results but cost of goods outpaced net sales just by a bit. The stock was up 1.77% on a day when the S&P500 (NYSEARCA:SPY) was down 2.09%! The stock is in my Dividend Portfolio and I've been debating whether to sell Covidien or Abbott Laboratories (NYSE:ABT) lately for a different healthcare stock, but after each company reported, I believe the decision has been made to sell Abbott. Even though Covidien may pull back with the broader market, this is one company I want to be buying up.

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!

Disclosure: I am long ABT, COV, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.