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Friday, 06/14/2013 11:32:24 PM

Friday, June 14, 2013 11:32:24 PM

Post# of 33
Cramer is all over this. Price target of $74 for the what is split from one current Covidien share.

Jim Cramer believes this company is about to create immense value with the stroke of a pen.

"And all they're doing is simply splitting into smaller, cleaner, more easily understood pieces," he said.

Cramer is talking about Covidien, a medical device company, that's spinning off its pharma division which will be called Mallinckrodt.

"Ever since December of 2011, I've been telling you that this move would create immense value, and sure enough, in the time since, Covidien has generated a 56% return," Cramer said.

Now that spin-off is imminent - Mallinckrodt is expected to break away completely by the end of the month.

"Covidien shareholders of record as of June 19th will receive one share of Mallinckrodt—the pharma business—for every eight shares of Covidien they own when the spin happens on June 28th," Cramer explained.

And that begs the question – what's an investor to do now?

"My original thesis was that Covidien's terrific medical device business was being dragged down by a not so hot pharma division; the point of the break up was to separate the strength from the weakness," Cramer said.

However, Cramer would not immediately sell Mallinckrodt . "I think you want to hold on to both," he said.

Now make no mistake; just because Cramer advocates holding both doesn't mean he advocates viewing both in the same way.

Looking at Covidien, Cramer thinks the stock could trade at a higher valuation after the split.

"Right now the non-broken up Covidien is a $65.50 stock that's trading at 15.8 times next year's earnings estimates. Once Covidien breaks up, I think the valuation will get a bit of a boost, because it will be a high-quality pure play medical device outfit. If the new Covidien sells for the same multiple as Abbot Labs, which trades at around 16.4 times next year's estimates, then Covidien, post spin off, should trade up to $68," Cramer said.

Going forward, Cramer can see shares marching even higher simply because it's a good company with solid fundamentals.
"The new Covidien will be a medical device company that can really shine. It's expected to post consistent 4 to 6 percent organic revenue growth, with double-digit long-term earnings per share growth, and a steady dividend to boot, supported by $2 billion in annual free cash flow," he said.

Looking at Mallinckrodt, Cramer sees near term gains but also recommends developing a clear exit strategy.

In the near-term Cramer thinks the stock may trade at a higher multiple. "If it simply trades up to the same levels as comparable branded and generic drug plays, then it could be worth $6 per share of Covidien. Of course, since you're only getting one share of Mallinckrodt for every eight shares of Covidien, that means I expect Mallinckrodt's stock could trade to $48."

However, in the long-term Cramer sees challenges." Mallinckrodt is far from being a great drug company," Cramer said. And I don't like the additional generic competition coming for them in 2014.
Therefore, Cramer says "you should be willing to let it go into strength either after the share price hits $48, or once we get to September when their current fiscal year ends, whichever comes first."