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Leading health care products maker Covidien plc (COV) is scheduled to release its fourth-quarter fiscal 2011 results on Tuesday, November 15. The Ireland-based company expects net sales for fiscal 2011 to grow 8% to 11% year over year.

Analysts polled by Zacks are currently looking for earnings per share of $1.05 and $3.94 on average for the fourth quarter and fiscal 2011, respectively. The current corresponding Zacks Consensus Estimates for sales are $3,027 million and $11,518 million.

With respect to earnings surprises, Covidien has consistently outperformed the Zacks Consensus Estimate in the preceding four quarters and we expect this positive surprise streak to continue into the fourth quarter. The company has delivered an average positive earnings surprise 10.40% over the past four quarters, implying that it has beaten the Zacks Consensus Estimate by that measure.

Third Quarter Revisited

Covidien’s third quarter adjusted earnings per share (from continuing operation) of $1.01 outshone the Zacks Consensus Estimate of $0.95 and were largely ahead of the year-ago earnings of $0.85. Profit (from continuing operation) ballooned 51% year over year, boosted by a sharp decrease in tax and strong growth at the company’s Medical Devices business.

Revenues spurted 14% year over year to $2,926 million, also topping the Zacks Consensus Estimate of $2,862 million. Healthy double-digit growth in the Medical Devices segment more than neutralized the softness at the Pharmaceuticals division.

Medical Devices sales surged 22% year over year led by Vascular and Energy Devices product-lines with acquisitions, new products and higher volume contributing to growth.

Covidien’s struggling Pharmaceuticals division had yet another weak quarter, with revenues edging down 1%, plagued by the divestiture of the U.S. nuclear pharmacy business and lower sales of specialty drugs. Revenues from the Medical Supplies segment inched up 3% on the back of higher medical surgical and nursing care product sales.

Estimate Revisions Trend

Agreement

Estimates for the fourth quarter for Covidien elicit a somewhat lack of action. Out of the 19 analysts currently covering the stock, none have made any revisions in either direction over the past week with just 1 analyst having raised his/her forecast over the past month with no reverse movements.

A similar trend applies for fiscal 2011, with just 1 analyst (out of 21) having hiked his/her estimate over the last 30 days with none moving in the opposite direction. No movements were observed over the past 7 days.

Magnitude

Given the relative lack of revision, the estimate for the fourth quarter remained static (at $1.05) over the last 7 and 30 days. Estimate for fiscal 2011 has moved up by a penny over the past month while remaining stationary (at $3.94) over the past week.

Our View

Covidien is a leading global health care products company with a rich history of developing and manufacturing high-quality products in a cost-effective manner. The company boasts of a well diversified product and technology portfolio. Covidien competes with Johnson & Johnson (JNJ), Becton Dickinson (BDX) and C.R. Bard (BCR), among others.

The company is expanding its footprint in emerging markets, notably in Asia and Latin America, and boosting market share in core segments through investments in sales and marketing infrastructure. Moreover, Covidien continues to roll out new products and technologies, focusing on faster-growing products and markets, and broadening its product range through acquisition and strategic collaborations.

Covidien remains committed to delivering incremental returns to investors leveraging solid free cash flows and strong earnings power. During its third quarter commentary, the company announced a restructuring program across its three business segments, aimed at boosting its cost structure. Cost savings from the restructuring should help it improve margins and profitability.

We feel that the company’s medical devices revenues in the fourth quarter would be driven by new products (including Tri-Staple) and contributions of eV3 acquisition. We also expect some recovery in the Pharmaceutical business. Moreover, as indicated in the third quarter call, revenues in the fourth quarter will benefit from an extra selling week.

Covidien is well placed to achieve its long-term revenue and earnings growth targets based on its attractive fundamentals, effective execution, new product cycle, synergies of acquisitions and expansion into emerging markets.

However, we are apprehensive about intense competition, reimbursement uncertainty and the sustained pricing and procedure volume pressure. Rising raw material costs also remain a headwind. We are currently Neutral on Covidien, backed by a short-term Zacks #3 Rank (Hold).

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Source: Covidien: Earnings Preview