Covidien plc (COV), Johnson & Johnson (JNJ), General Electric Company (GE): Has This Stock Priced in the Near Term Risk?

Varian Medical Systems, Inc. (NYSE:VAR) is another company I like for its emerging market growth prospects. Indeed, its latest results demonstrated strong growth from the BRICs and other emerging markets. The problem is that its equipment requires large capital outlays at a time when clinics in the US and Europe are under budgetary constraints. It was no surprise to me that its North American oncology systems net orders were weaker with a 9% decline, and it isn’t just macro. US hospitals are faced with uncertainty over reimbursement issues and health care reforms. It is all well and good lauding the claims of radiotherapy as being a cost effective treatment, but if clinics are financially constrained they will delay ordering.

Varian Medical Systems, Inc. (NYSE:VAR) is definitely a stock to watch–mainly for its BRIC growth prospects–but I think buying it depends on timing the moment when the market is fearful of Western healthcare spending.

What About Covidien?

Covidien plc (NYSE:COV) is a kind of a mix of these companies. Rather like Johnson & Johnson (NYSE:JNJ)’s surgical division, it needs decent growth in hospital procedures in order to drive revenues at its key endo-mechanical and energy devices segments. And in common with General Electric Company (NYSE:GE) it is seeing pricing pressure from hospitals. Covidien plc (NYSE:COV)’s management made it clear that there wouldn’t be ‘upside to pricing going forward’. In other words, it’s all about volumes.

There is a silver lining in the sense that Covidien plc (NYSE:COV) doesn’t really sell a huge amount of large ticket capital spending items. In other words many of its revenue streams can fall under the radar of cutbacks at hospitals. With that said, it was affected in the quarter (at least within Western markets) by capital spending pressures, and it’s time that the market realizes this.

There was also some uneven performance among its industry segments.

Energy remains a strong point for Covidien as its solutions offer cost effective ways for surgeons to achieve better outcomes and reduce hospital costs. Meanwhile endomechanical put in another strong performance helped by stapling. However in its third key market (vascular) there were some disappointments. Covidien plc (NYSE:COV) lost a key contract, and growth for Q3 is forecast ‘significantly below that of Q2’. Since Q2’s growth was a lowly 3.6% in vascular, I think investors should brace themselves for next quarter’s vascular results.

The Bottom Line

Covidien gave notice that Q3 would come up against some difficult yearly comparisons, and the weakness in vascular is also going to hurt performance. Moreover, the uncertainty over healthcare regulations and funding may hit capital spending in energy. In addition its plans for increased investment spending are likely to trim margins.

With that said Covidien plc (NYSE:COV) has many good long term drivers. The pharma spinoff will allow it to focus efforts and possibly invest in some acquisitions. Longer term I think this stock will do well but growth is slowing this year and I’m not sure it’s good value just yet. One for the watch list.

The article Has This Stock Priced in the Near Term Risk? originally appeared on Fool.com is written by Lee Samaha.

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