A stock that gets dropped from the S&P 500 usually also gets axed by investors. But Covidien (COV), a Tyco International (TYC) spin-off that joined the index when it started trading on its own in 2007, remains a favorite even after it was ousted on June 5. Of 14 analysts who follow it, 13 recommend buying it, and one rates it a hold.
The shares have been on the rise since March, when they sank to 27. Now at 35.46, Covidien, which makes surgical tools and laparoscopic instruments, should climb to 44 in a year, says Anatoliy Cherevach of investment firm Cohen & Steers, which owns shares. "Management has done a terrific job running the company since Tyco spun it off," he says.
Tyco didn't reinvest what the unit earned, using it instead as a cash cow, says Cherevach. Tyco was based in Bermuda, but Covidien just reincorporated in Ireland. That led Standard & Poor's (MHP) to drop it from its 500, 100, and MidCap 400 indexes. Covidien began trading on the Big Board on June 5.
Earnings will be driven by a restructuring aimed at lowering tax rates and costs and boosting free cash flow, says Jeffrey Englander of S&P, who rates Covidien a buy. He sees free cash flow of $1 billion in 2009 and expects Covidien to earn $3.17 a share in fiscal 2009 on revenues of $10.2 billion, up from 2008's $2.86 on $9.9 billion.
Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.