Covidien Ltd.: Back up the truck

Posted Sep 30th 2009 10:40AM by Joseph Lazzaro
Filed under: Stocks to Buy

I'm reiterating my Buy rating for medical device supplier Covidien Ltd. (NYSE: COV), first recommended on June 4, 2009, at a price of $35.65. If you purchased Covidien then, you're up about 15%.

An aging U.S. population and the likelihood that U.S. public policy to universalize health care will lead to least 3-5 million more citizens per year for the next eight to ten years receiving regular health care services means one thing: it's a good time to be a medical supplier.

Meanwhile, cost controls remain good, and the company should receive a modest tailwind from lower material costs, offset slightly by a net-negative foreign exchange variable. The First Call FY2009/FY2010 EPS estimates for COV are $2.83 to $3.21.

Technically, Covidien's stock chart is solid: an uptrend, with minor, corrective pull-backs, and the stock continually stays above the 50-day moving average, an indication that institutional investors are adding to their COV positions.

Stock Analysis: Covidien Ltd. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% 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 75% of your COV position before December 2009. Sell/Stop Loss if you were to buy shares in this company: $17.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: COV, Covidien Ltd.