Weekly Stock Call

July 7, 2010
Current Price – US$68.18

Becton, Dickinson and Company is selected as this week’s candidate on the basis of attractive valuation, a strong balance sheet and competitive returns. The medical devices industry in which BDX operates presently faces significant demand and pricing pressures particularly from current recessionary conditions, health care reform initiatives, and threat of competition form new entrants (emerging market producers and integration/consolidation within the value chain). BDX, however, holds and continues to build competitive advantages in productivity, product quality, innovation and brand establishment. I feel that these advantages, combined with opportunities for geographic expansion and the appetite of an aging western demographic for high quality healthcare, will result in correction to the value of BDX’s shares in due time.

BDX is a global medical technology company engaged principally in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.
Annual revenues (U.S.$ 7.2B in 2009) are derived from three major business segments; Medical (52%), Diagnostics (31%) and Biosciences (17%). The company is geographically diversified with manufacturing in 15 countries and derives 55% of revenues outside of the United States. Continued global expansion, high margin product development and operational productivity improvement form the basis for BD’s long term growth strategy. The company has paid 37 consecutive years of increasing dividends.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Becton, Dickinson and Company of US$83.15.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield        22.1%
Dividend yield    2.2%
Total return      24.3%


Risks

Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report.

Healthcare Reform – reforms proposed in the United States and other developed markets threaten to place downward pressure on product demand and profit margins.

Competition – ongoing consolidation and vertical integration within the industry, or new entrants from developing economies, may result in pricing pressure and headwinds to gaining international market share.

Currency Exchange – weakening currencies in foreign markets tend to reduce U.S$ revenues and make U.S. imports less attractive in those markets.

Legal - BDX is involved both as a plaintiff and a defendant in numerous legal proceedings and claims that arise in the ordinary course of business, particularly in matters of antitrust and product liability, and while they attempt to make provisions for probable liabilities, unanticipated material liabilities may still exist.

Technological – possible threat of development of lower cost processes by competitors or the introduction of substitute technologies (i.e. needleless injection). 


The Numbers

Share Price ($US) 68.18 
Market Cap ($US B) 15.9 
No. Shares (M) 233 
ROE22.9%
ROA13.2%
P/E Ratio 13.2 
Price/Sales Ratio 2.2 
Price/Book 3.1 
Current Ratio 2.6 
Interest Coverage 41.3 
Total Debt/Equity 0.33


Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.


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