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Stock Strategist

Covidien's Mallinckrodt Spin-Off Faces Challenging Environment

Mallinckrodt's lack of scale and weak branded business keep it from earning a moat.


On June 28,  Covidien (COV) plans to spin off its specialty pharmaceutical segment, Mallinckrodt MNK, as a separate publicly traded company. Covidien shareholders will receive one share of Mallinckrodt for every eight shares of Covidien.

Mallinckrodt's focus on the highly regulated nuclear imaging and controlled substance markets gives it an interesting niche with some barriers to entry, but it is not strong enough to warrant a moat. In our opinion, the firm's best asset is its nuclear imaging business, where it faces minimal competition, but the segment is overshadowed by the company's larger contrast media and generic drug segments, both of which are highly competitive and lack moats. Our fair value estimate is $40 per share, slightly below where the stock is currently trading on a when-issued basis.

David Krempa does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.