An aging U.S. population, and the likelihood that U.S. public policy will be to universalize health care, will lead to at least 3-5 million more citizens per year over the next 8-10 years receiving regular health care services. That means one thing: it's a good time to be a medical supplier. And that means it's a good time to review Covidien, Ltd. (NYSE: COV). In general, analysts see moderate-to-good earnings growth for COV in FY2009/FY2010, aided by a focus on medical/surgical devices and imaging solutions.
Meanwhile, cost controls remain good, and the company should receive a modest tailwind from lower raw material costs, offset slightly by a net-negative foreign exchange variable. The First Call FY2009/FY2010 EPS estimates for COV are $2.64 to $3.03.
Covidien also has a solid balance sheet, dependable earnings streams, and the cash to make suitable acquisitions, repay debt and/or buyback shares, as warranted. A P/E of 14 further tips the scale in favor of a Buy.
The risks include intensifying competition, and a rising dollar, the latter of which would make COV's goods more expensive to foreign buyers, who account for about 45% of sales.
Stock Analysis: Covidien is a moderate-risk stock. Consider buying a 25% position in COV now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your COV position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $17.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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