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Covidien Scopes Out Medical Technology Growth

NEW YORK ( TheStreet) -- The last time I talked about Covidien (COV), I expressed shock and disappointment that no one else was interested in the company. While the larger med-tech rivals such as Johnson & Johnson (JNJ) and Abbott Labs (ABT) were posting in-line results, Covidien's management, which I believe has always been underrated, posted strong growth results with pinpoint execution.

Now Covidien is suddenly in the spotlight. Shares are up 30% year to date, one of the best performers not only in medtech but in the entire market. Contrary to prior estimates, I've seen no adverse impacts on the company's operation following the spinoff of its pharmaceuticals business to Mallinckrodt (MNK).

If fact, while the lost revenue from the drugs business might appear as a negative, the post-Mallinckrodt operation seems leaner, which should add a boost to long-term margins. This is the same advantage gained by Abbott Labs upon spinning off its drug business AbbVie (ABBV) earlier in the year. The question now is, Can Covidien's now-more-focused management find ways to sustain the company's growth momentum?

Never shy about doing deals, last week management announced plans to enter the $3 billion gastrointestinal (GI) market with a $860 million all-cash deal for Given Imaging (GIVN), a company with close to 90% global share in the growing endoscopy market.

So, with Given's large global reach, it is understandable Covidien opted to pay more perhaps than it would have liked. The deal valued Given at $30 per share, or 27% above its most recent closing price. On the flip side, Covidien is not a cash-rich company -- not according to the balance sheet, at least.

Management is paying roughly four times Given's fiscal 2014 revenue. This is yet another head-scratcher in determining what Covidien believes it is actually getting, especially with its poor history of margin performance.

But this is not the first time Covidien has puzzled the Street.

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