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Covidien Is Growing Where Others Don't

What's more, increases were seen in almost every businesses division. Covidien's drug segment was equally impressive, growing at 13% year over year, outpacing Johnson & Johnson by 2%. Likewise, Covidien's API (active pharmaceutical ingredients) business was up 12% and the company posted a stout 53% increase in Specialty Pharmaceutical sales.

Management said the strong pharmaceutical performance was partly due to the company's new product launches in the first quarter, which included HCI ER tablets as well as a strong performance from such drugs as Exalgo. It wasn't all good news, though, as the Contrast Products business and Radiopharmaceuticals edged down 11% and 6%, respectively.

It's hard to not have been impressed by this performance. But solid growth and execution has been the standard here for well over a year. Now that Covidien is no longer a surprise, it's worth speculating on how long this performance can continue. Ordinarily, there would be signs of slowing down but I see nothing but possible upside from here.

That's not to suggest, however, that this company is flawless. The weakness in the Contrast Products business and in Radiopharmaceuticals serve as opportunities for improvement. Investors shouldn't underestimate what a resurgent Johnson & Johnson and/or Abbott Labs can do to thwart Covidien's progress.

While organic growth remains an issue in their respective businesses, particularly in devices, neither JNJ or ABT will just cede any portion of the market to Covidien.

The question, then, is to what length Covidien will go to maintain its growth trajectory, while also maintaining it margins - given its deficit in size when compared to Abbott and Johnson & Johnson.

In that regard, there are also questions about how much value will be unlocked if and when Covidien does spin off its drug business, Mallinckrodt, later this year. This is something Abbott knows about all too well after spinning off its drug business AbbVie (ABBV) in January. As noted above, this is a move that Johnson & Johnson has resisted, despite investors' pleas.

Bottom Line

Covidien's management has targeted mid-2013 for the spinoff, which suggests any time after the end of this month (May). It remains to be seen how this move will impact upon Covidien's remaining business, which will then place a new focus on (among others) the devices segment, which has not been as impressive as the pharmaceuticals.

But the good news is the "leaner" Covidien should add a boost to margins, which just missed Street estimates. In the meantime, Covidien investors have plenty of reasons to be excited about the growth trajectory of this company.

The stock, however, is no longer cheap. But given the momentum in the drug business and optimism that surrounds the spinoff, it's hard to bet against more gains.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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