The Zacks Analyst Blog Highlights: Medtronic, Covidien, Mylan, Actavis and Jazz Pharmaceuticals

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Aug 01, 2014, 09:30 ET

CHICAGO, Aug. 1, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Medtronic, Inc. (NYSE:MDT-Free Report), Covidien plc (NYSE:COV-Free Report), Mylan, Inc. (Nasdaq:MYL-Free Report), Actavis plc (NYSE:ACT-Free Report) and Jazz Pharmaceuticals (Nasdaq:JAZZ-Free Report).

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Here are highlights from Thursday's Analyst Blog:

Tax Inversion: The Boon and the Bane

The US federal government may be threatened to lose billions of dollars in revenues. A joint congressional committee on taxation estimates the U.S. Treasury may lose $19.5 billion over the next decade. On the other hand, the corporate houses, which may include some of your favorite stocks, are strategically well placed to save those billion bucks. The common reason for these is Tax inversion.

Simply put, this latest trend is US corporate houses acquiring offshore companies in nations that offer a lower tax rates. By acquiring the foreign companies, these US firms are shifting their legal homes and thereby chopping the tax bills.

The global merger & acquisition (M&A) activity clocked a seven-year high. Recurrent foreign acquisitions by U.S. companies indicate that tax inversion is one of the major reasons behind the spike. The tax rate is the highest in the US and thus it is logical for the US firms to find alternative sources whereby they can limit their tax burden.

No matter what it costs to the exchequer, trimming the tax burden will eventually help the US firms have more cash in their pocket. This additional cash along with advantages like boosting a product portfolio or adding skilled workforce through acquisitions should help these firms do better. Eventually, this should get reflected in their stock prices as well.

What Is Tax Inversion?

Medtronic, Inc.'s (NYSE:MDT-Free Report) $42.9 billion acquisition of its Irish competitor in surgical technologies and global healthcare major Covidien plc (NYSE:COV-Free Report) is a good example of the tax inversion process. The deal was an effort to offset the impact of high U.S. corporate tax rate by shifting Medtronic's tax base overseas.

A tax inversion involves the acquisition of a foreign company and subsequently adopting its home country's domicile. Alternatively, the combined entity can create a holding company in a country where tax rate is lower.

Healthcare Sector Taps Most of the Opportunity

We note that the trend of tax inversion has been mostly prevalent in the healthcare sector. Medical devices and pharma companies are rapidly buying foreign competitors. It is usually easier for a large corporation to purchase small companies than to develop new drugs indigenously. Also, the market for drugs is truly global. Thus the advantages are huge in addition to offloading the tax burden.

Many large US pharma companies already have considerable international revenue base. Tax inversion will further increase their international presence. A strong European pharma sector also makes for several potential targets.

Apart from Medtronic, Mylan, Inc. (Nasdaq:MYL-Free Report), Actavis plc (NYSE:ACT-Free Report) and Jazz Pharmaceuticals (Nasdaq:JAZZ-Free Report) are among the other players in the pharma space reaping the benefits. (Read: Pharma, Biotech M&As Heat Up: Tax Inversion in Focus)

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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