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Covered Call Recommendation on Covidien

STRATEGY: Covered Call Recommendation on COV

Look at the January 2012 47.50 covered call for an income investment. For each 100 shares of Covidien PLC (COV) stock you buy, sell one January 2012 47.50 covered call option for a 44.13 (48.43 – 4.30) debit or better. That’s potentially a 7.6% assigned return. Plus, COV is expected to pay one dividend during that period, which should boost the return higher. The ex-dividend date on this distribution is expected in late September.

 The technicals for COV are bearish with a strong downward trend. The stock is under accumulation with support at 48.05. S&P rates this stock 5 STARS (out of five) – strong buy.
 S&P reiterates Strong Buy opinion on shares of Covidien PLC (COV) . COV outlined its focus on innovation, product portfolio management and efficiencies, and we remain encouraged by its product launches and China expansion. We see 4.7% revenue growth in FY 12 (Sep.), vs. 11% in FY 11, mainly on the lapping of acquisitions. However, we view 10% EPS growth from $3.95 we see in FY 11 to $4.34 in FY 12 (both trimmed today by$0.01) as doable, assuming gross margin expansion outweighs headwind of FY 11’s extra week. We view cash flow as strong, providing financial flexibility, but trim our target price by $2to $64 on peer valuation compression.