Iridian Asset Management's 4Q 2013 positions

Part 4
Iridian Asset Management's 4Q 2013 positions (Part 4 of 7)

Must know: Reason for Iridian to initiate a position in Covidien

Covidien plc (COV) is a 1.02% position, newly initiated, in Iridian Asset Management’s portfolio. Covidien develops, manufactures, and sells a diverse range of industry-leading medical device and supply products.

COV statsEnlarge GraphCovidien recently reported 1Q14 results that beat analyst estimates although earnings declined 19% as expenses increased largely due to the medical device tax and spending on growth initiatives. Sales in the company’s largest segment medical-devices was up 3% to $2.25 billion. Medical-supplies increased to $388 million from $385 million in the year ago quarter. Within Surgical Solutions, the Advanced Surgical business, which accounts for one third of Covidien’s overall revenue, saw 10% growth, mainly due to stapling and vessel sealing. The company continued to see growth above market in many product categories including vessel sealing, stapling, sutures, and sensors.

CovidienEnlarge Graph

During the first quarter of 2014, Covidien executed on its strategy of innovation, customer-focused portfolio management, emerging markets growth, and driving operational leverage. The company acquired Given Imaging, which develops innovative diagnostic and monitoring technologies for the digestive system, for $860 million. In Brazil, Covidien acquired WEM Equipamentos Eletrônicos Ltda., a privately held manufacturer of electrosurgical generators, disposables, and accessories. In China, Covidien entered into a joint venture with the Changzhou Kangdi Medical Stapler Co., Ltd., a manufacturer of open stapler products based in Jiangsu Province.

In July, Covidien spun off its pharmaceuticals business into Mallinckrodt (MNK), an independent publicly traded company. The spin off was expected to improve Covidien’s margins and growth profile. Covidien announced a 23% increase in the quarterly dividend rate, from $0.26 per ordinary share to $0.32 per ordinary share last year. Jose Almeida, Chairman, President, and CEO said, “As we have previously announced, the company intends to continue to increase its dividend and is targeting a dividend payout ratio in excess of 35% over time. Because of this, we expect dividends to increase at or above the rate of earnings growth for the next several years.”

COV hedgeEnlarge GraphCovidien’s peers include C. R. Bard, Inc. (BCR), Becton Dickinson (BDX), Johnson & Johnson (JNJ), and Baxter Intl Inc (BAX).

The Realist Discussions