Covidien plc Quarterly Stock Valuation – October 2014 $COV

Cov_hrz_rgb_posBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor – September 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Covidien plc (COV) fares in the ModernGraham valuation model.

Company 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. The Company 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 and other medical products; Pharmaceuticals, which includes the development, manufacture and distribution of specialty pharmaceuticals, active pharmaceutical ingredients, contrast products and radiopharmaceuticals., and Medical Supplies, which includes the development, manufacture and sale of nursing care products, medical surgical products, SharpSafety products and original equipment manufacturer (OEM) products. In August 2014, the Company acquired Reverse MedicalCorporation. In August 2014, the Company acquired Sapheon Inc.
COV Chart

COV data by YCharts

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 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  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

Key Data:

Recent Price $85.50
MG Value $71.18
MG Opinion Overvalued
Value Based on 3% Growth $57.01
Value Based on 0% Growth $33.42
Market Implied Growth Rate 6.62%
Net Current Asset Value (NCAV) -$11.49
PEmg 21.74
Current Ratio 1.81
PB Ratio 3.88

Balance Sheet – 6/27/2014

Current Assets $5,080,000,000
Current Liabilities $2,805,000,000
Total Debt $4,042,000,000
Total Assets $20,223,000,000
Intangible Assets $11,927,000,000
Total Liabilities $10,269,000,000
Outstanding Shares 451,600,000

Earnings Per Share

2014 (estimate) $4.00
2013 $3.72
2012 $4.26
2011 $3.97
2010 $3.38
2009 $2.84
2008 $2.70
2007 $2.72
2006 $2.88
2005 $2.26
2004 $2.65

Earnings Per Share – ModernGraham

2014 (estimate) $3.93
2013 $3.81
2012 $3.71
2011 $3.33
2010 $2.98
2009 $2.75

Dividend History
COV Dividend Chart

COV Dividend data by YCharts


Covidien plc is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the company’s low current ratio, short dividend history, and high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.98 in 2010 to an estimated $3.93 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 6.62% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Covidien plc (COV) for better perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Covidien plc (COV)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Covidien plc (COV) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.






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