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Inside Wall Street


On the Mend at Covidien

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.

More Farmers Cotton to AGCO

Times have been tough on the farm lately, causing AGCO (AGCO), No. 3 in world agricultural gear, to cut its 2009 earnings forecast. Analysts scaled back estimates for AGCO, whose brands include Massey- Ferguson, yet investors hardly winced. Rather than getting plowed, AGCO stock trades at 28.77, up from 15 on Mar. 6. "Earnings in the next four quarters will beat expectations," says Michael Camp of Northwest Criterion Asset Management, which owns shares.

A big plus is the U.S. stimulus package, expected to aid farmers. Overseas, AGCO has 60% of the tractor market in Brazil and is eyeing China and Russia. Farming in Russia is fast modernizing, and in China, small-farm consolidation will require more equipment, says Camp.

Andrew Obin of Bank of America (BAC) rates AGCO a buy with a 12-month price target of 33.

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.

IMAX Is Thinking Bigger

Certain big investors have loaded up on shares of IMAX (IMAX), and this has driven the stock to 7.20, up from an abyss of 2.40 on Nov. 21. Smart-money outfits such as Pequot Capital Management, Mario Gabelli, and Marshall & Ilsley are big on IMAX, the pioneer and leader in large-format digital-based cinema. IMAX operates 371 theaters—both commercial and institutional—in 42 countries. "IMAX is rolling out about 70 new screens this year as more movies are being shown in IMAX," says Ryan Crane of Stephens Investment Management, which owns shares.

Eric Wold of investment firm Merriman Curhan Ford, who rates IMAX a buy, figures its second-quarter box office could hit between $62 million and $70 million. He pegs earnings before interest, taxes, depreciation, and amortization at $45.5 million in 2009 and $70.6 million in 2010.

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.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.


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