ModernGraham Valuation: Covidien Ltd (COV)

moneyCompany Profile (obtained from Google Finance): Covidien Public Limited Company is engaged in the development, manufacture and sale of healthcare products for use in clinical and home settings. It operates its businesses through three segments: Medical Devices, which includes the development, manufacture and sale of endomechanical instruments, energy devices, soft tissue repair products, vascular products, oximetry and monitoring products, airway and ventilation products; Pharmaceuticals, which includes the development, manufacture and distribution of specialty pharmaceuticals and active pharmaceutical ingredients, and Medical Supplies, SharpSafety products and original equipment manufacturer products. In January 2013, the Company acquired CV Ingenuity. In July 2013, the Company completed the separation of its Pharmaceuticals business, which is held by Mallinckrodt plc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $131.13
MG Opinion Undervalued
Value Based on 3% Growth $50.30
Value Based on 0% Growth $29.48
Market Implied Growth Rate 5.79%
Net Current Asset Value (NCAV) -$10.62
PEmg 20.09
Current Ratio 2.22
PB Ratio 3.41

Balance Sheet – 9/30/2013 

Current Assets $5,867,000,000
Current Liabilities $2,639,000,000
Total Debt $5,018,000,000
Total Assets $19,918,000,000
Intangible Assets $10,859,000,000
Total Liabilities $10,676,000,000
Outstanding Shares 452,770,000

Earnings Per Share

2013 $3.40
2012 $3.92
2011 $3.79
2010 $3.10
2009 $1.78
2008 $2.86
2007 -$0.68
2006 $2.88
2005 $2.26
2004 $2.65
2003 $2.08

Earnings Per Share – ModernGraham 

2013 $3.47
2012 $3.37
2011 $2.78
2010 $2.18
2009 $1.75
2008 $1.83


Covidien Ltd is a company that presents a great opportunity for Enterprising Investors.  The company does not qualify for the Defensive Investor, though, because of its lack of earnings stability, dividend history, and it is currently trading at high PEmg and PB ratios.  The company does qualify for the Enterprising Investor, and this type of value investor following Benjamin Graham’s methods should feel comfortable proceeding with further research.  One suggestion for further research would be a review of ModernGraham’s valuation of Johnson & Johnson (JNJ).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.83 in 2008 to $3.47 in 2013.  This level of earnings growth more than supports the market’s implied growth estimate of 5.79%, and the company appears to be undervalued at the present time.

What do you think?  Do you agree that Covidien Ltd. is undervalued?  What would be your assessment?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Costco Wholesale Corp (COST) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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