Cramer's Mad Money - The Smartest Thing Covidien Has Ever Done (12/19/11)

Includes: DRI, KMP, MCD, MDT, PAA, YUM
by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday December 19.

Covidien (COV)

Sometimes breaking up is good to do for companies that can unlock more value separate than working as a unit. Covidien (COV) announced it is going to spin off its troubled pharma division from its medical devices business. Its pharma business currently represents only 17% of its sales, and Cramer calls the spin-off "the smartest thing Covidien has ever done." The medical devices and pharma businesses have been hard to manage within a single company, and the pharma segment has faced recalls, supply problems and competition from generics. The company trades at a multiple of 9 and would be worth 38% more as separate companies.

Yum Brands (NYSE:YUM), McDonald's (NYSE:MCD), Darden Restaurants (NYSE:DRI), Chipotle Mexican Grill (NYSE:CMG)

Yum Brands (YUM) is the world's largest restaurant operator, and is currently bigger internationally even than McDonald's (MCD). China is the driver of YUM's growth, with 75% of the company's locations, up from 48% in 2006. Compare this with Darden's (DRI) badly missed numbers; Yum predicts 10% earnings growth for 2012. China now accounts for 45% of YUM's revenues, with only 25% from domestic sales. With 4,200 locations in the Middle Kingdom, Yum could double its footprint there and still not face saturation. Chinese same store sales are a staggering 19%, but China isn't the only secret to Yum's success; the company is expanding all over Asia. YUM's domestic business has not been strong, but it accounts for only a small part of its revenues; there was talk of YUM spinning off Taco Bell, or even its entire U.S. business. YUM sells at a multiple of 17.8 compared to its 12.7% growth rate. Cramer would wait for a pullback to buy "one of the strongest international growth stories in the restaurant space."

Cramer took some calls:

Chipotle Mexican Grill (CMG) is a good company, but is also a high growth multiple stock, and such stocks are risky in the current environment.

McDonald's: Cramer would take a bit of MCD off the table.

Kinder Morgan Energy Partners (NYSE:KMP) vs. Plains All-American Pipeline (NYSE:PAA)

Kinder Morgan Energy Partners (KMP) has long been a favorite MLP of Cramer, but he decided to compare it to Plains All-American Pipeline (PAA), another pipeline play with promise. Both stocks have similar distributions: KMP yields 5.8% compared to PAA's 5.7%. PAA is one third of the size of KMP, but PAA has a significant footprint in the Bakken and is making smart acquisitions that will increase its assets. PAA expects its distribution to rise 8-9% by next year. While Cramer prefers KMP as a long-term play, he thinks PAA has enough short-term catalysts to make it a buy in the near term.


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