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Covidien (COV) Initiated as 'Buy' by Brean Capital, PT $66

 November 20, 2012 11:33 AM

(By Balachander) Covidien Plc (NYSE: COV) shares were initiated with a "buy" rating and price target of $66 by Brean Capital LLC.

The company is a premium name within medtech, consistently delivering solid mid-single digit growth (3 percent -5 percent) top-line organic growth and double-digit bottom line growth, the brokerage said.

Brean Capital said Covidien's product mix is heavily weighted toward lower ASP (under $500), but non-commoditized high efficacy to dollar products—that continue to thrive, even in a difficult hospital environment. 

In addition, the company's growth is also driven by dominant market positions, emerging market expansion and a disciplined portfolio approach with an excellent track record in buying AND selling, the brokerage said.

[Related -S&P Buys That Pass The Buffett Test]

Brean Capital estimates COV will generate over $2 billion in free cash flow in F2013 (7 percent FCF yield) and return half to shareholders.

"At the end of the 3Q (July 2013), COV plans a tax free spin of this business, which will create some dilution from an increase in infrastructure cost and a temporary unwinding of tax infrastructures, but we see increased value in separating the business," the brokerage wrote.

Brean Capital wrote that risk to its price target includes risk of a dilutive acquisition, legal and regulatory risk, and increased pricing and volume pressure. The company is only partially hedged and has an increasing international footprint, making it susceptible to FX volatility.

[Related -Dividend Roundup: INTC, HPQ, COV, MOV, WASH]

Shares of the Dublin-based company, which has been trading in the 52-week range of $41.69 to $60.81, shed 0.28 percent to trade at $56.59 on Tuesday.



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