Can Covidien (COV) Keep the Earnings Streak Alive? - Analyst Blog

Covidien plc COV is set to report its second-quarter fiscal 2014 results on April 25, 2014. In the last reported quarter, the company had posted a positive earnings surprise of 6.38%. In fact, Covidien delivered positive surprises in all of its last 4 quarters, with an average beat of 2.61%. Let's see how things are shaping up for this announcement.  

Factors at Play in the Past Quarter

Despite unfavorable foreign exchange rate, the medical device tax and incremental investments in emerging markets, Covidien's first-quarter earnings rose 3.1% year over year to $1.00 per share and beat the Zacks Consensus Estimate by 6 cents.

In the last reported quarter, Covidien's adjusted operating earnings declined 0.8% year over year to $599 million, while reported operating earnings dropped 10.9% to $531 million.  Unfavorable foreign exchange rate and the medical device tax led to this decline in both the reported and adjusted operating earnings.

However, management remains impressed with the 2.8% year-over-year increase in the company's revenues to $2,639 million, which exceeded the Zacks Consensus Estimate by 1.42%. The company expects revenues to grow 2–5% year over year at constant exchange rate for fiscal 2014.

Earnings Whispers?

Our proven model does not conclusively show that Covidien is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP:  Covidien has a negative Zacks ESP. That is because the Most Accurate estimate stands at 94 cents while the Zacks Consensus Estimate is higher at 95 cents. That leads to a difference of -1.05%.

Zacks Rank: Covidien's Zacks Rank #3 (Hold) when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other medical companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:  

Align Technology Inc. ALGN, earnings ESP of +13.89% and a Zacks Rank #1 (Strong Buy).

Myriad Genetics Inc. MYGN, earnings ESP of +10.87% and a Zacks Rank #1 (Strong Buy).

Cardinal Health, Inc. CAH, earnings ESP of +1.00% and Zacks Rank #2 (Buy).