We've downgraded Covidien (COV), which engages in the development, manufacture and sale of health care products for use in clinical and home settings worldwide, from hold to sell, driven by its weak operating cash flow.
Net operating cash flow has decreased to $512 million, or 18.85% when compared with the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower. Despite currently having a low debt-to-equity ratio of 0.39, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. The company's quick ratio of 1.44 is sturdy. Covidien's gross profit margin for is rather high at 58.7%, having increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 15.90% trails the industry average. On the basis of return on equity, Covidien has underperformed the health care equipment and supplies industry but outperformed the S&P 500.
Shares are down 9.8%, reflecting, in part, the market's overall decline, investors ignoring the increase in its earnings per share. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
We've downgraded diversified energy company National Fuel Gas (NFG - Get Report) from buy to hold. Strengths include its robust revenue growth, notable return on equity and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, poor profit margins and a decline in the stock price during the past year.