For most of 2012 and 2013, Covidien (NYSE:COV) was the not-so-little med-tech that could. In an environment were companies like Johnson & Johnson (NYSE:JNJ), Bard (NYSE:BCR), Stryker (NYSE:SYK), and Abbott (NYSE:ABT) were struggling to deliver sustained attractive growth in devices, Coviden managed to do so. Now, though, it looks like the Street has caught up with Covidien’s prospects and the sequential deceleration in device growth could make it harder for these shares to outperform. Still, as one of the best companies in a still-popular sector, I wouldn’t be in a hurry to sell if I owned shares.
SEE: A Checklist For Successful Medical Technology Investment
Overall Performance Continues To Lead, But Slow Spots Are Appearing
With 3% reported growth and 4% organic growth, Covidien basically hit its mark for the fiscal third quarter. While revenue from the supplies business declined 1%, core device growth was up 6% on a constant currency basis, making it one of the strongest large-cap device growth names.
That said, it’s not all roses for Covidien. Businesses like endomechanical (up 8%), energy (up 10%), and oximetry/monitoring (up 15%) are maintaining very healthy growth rates and gaining share, but Covidien’s soft tissue and vascular businesses are looking quite a bit more ordinary (flat and up 1%, respectively, this quarter).
Margins were okay, and I wouldn’t read a lot into this quarter, given the split with Malliinckrodt (NYSE:MNK). Gross margin declined a point, but this was in line with expectations and due primarily due to forex. Likewise, while the 5% decline in operating income was not exactly good news, the company’s performance was as expected.
Opportunity Versus Timing
One of the big long-term drivers for Covidien is that the global minimally invasive surgery (MIS) market is still less than one-quarter penetrated, with likely only about one-third penetration in the U.S. Given the improvements in outcomes and total costs, I expect MIS adoption to continue to grow, with Covidien well-placed to benefit with its strong share in endomechanical and energy devices.
Of course, it’s never quite that simple. While MIS penetration is already above 90% in gall bladder procedures and above 85% in bariatric surgeries, Intuitive Surgical (Nasdaq:ISRG) has identified both of these as potential growth markets for its robotic surgery approach. On the other hand, markets like colorectal and hernia surgery are dramatically under-penetrated (15% to 30%), so I think Covidien will, on balance, gain more than it may lose to Intuitive.
Top Medical Companies To Invest In 2014: Algeta ASA (ALGETA.OL)
Algeta ASA is a Norway-based biotechnology company engaged in the development of targeted cancer therapies based on its alpha-pharmaceutical platform. The Company