BDX - Becton Dickinson: Management Raising Guidance Was A Pleasant Surprise

Summary

• Becton, Dickinson and Company is a leading player in the medical technology and life sciences industries, with a focus on both inpatient and outpatient settings.
• Becton, Dickinson in fiscal Q1 2023 reported a 3% growth in revenue to $4.59 billion and exceeded EPS expectations ($2.98).
• Management raised its guidance for the rest of the year with a core revenue growth target of 5.75% to 6.75%.

Recommendation

Becton, Dickinson and Company ( BDX ) is a major player in the Medtech and Life Sciences industries, with extensive experience in both inpatient and outpatient settings. Looking at its history, BDX has been successfully in shifting its R&D and exposures to higher growth verticals, which is accelerating its growth profile. Its rapid increase in tuck-in purchases in the past few years is now bearing fruit. Additionally, the company has recently done an excellent job addressing supply chain issues and increasing prices to account for inflation.

In the future, I expect Becton, Dickinson and Company to reap the rewards of rising patient and surgical volumes as well as a more predictable CAPEX climate.

Latest earnings highlights

For fiscal Q1 of 2023 , BDX reported revenue of $4.59 billion, up 3% year-over-year organically, and EPS of $2.98, exceeding consensus estimates of $2.68. An unexpected move was BDX's uptick in guidance after only one quarter, which is based on the expectation that core revenue will expand by 5.75 percent to 6.75 percent year-over-year, adjusting for currency effects. Not only was I impressed by BDX's margin improvement, but I also find this to be a promising sign.

P&L movements

After adjusting for the impact of FX rate fluctuations of 200 bps on revenues of $19.1 to $19.3 billion, Becton, Dickinson and Company anticipates constant currency growth of 5.75% to 6.75% for FY23. This forecast includes a contribution of approximately 100 bps from M&A, primarily from Parata. It is now expected that revenues from COVID-only testing will be in the range of $50 million to $100 million, and an implied inclusion of $90 million in base business performance. Regarding Alaris, projections are consistent with FY22 in that they count only sales for medical necessity as revenue. Sequentially, the Medical industry (including the effect of Parata) is projected to outpace the full-company range, while the Interventional industry is projected to outpace the median of the full-company range, and the Life sciences industry is projected to underperform the range.

My conclusion is that the Becton, Dickinson and Company rate of growth in revenues should be fairly constant throughout the rest of the year. Similarly to FY22, revenue from COVID-only testing will likely be heavier in the first half of the year due to the colder weather. In terms of foreign exchange, I anticipate that, given current rates, the majority of the impact will be felt in 1H23.

When it comes to margins, I anticipate a flat or slightly up year for gross margin and an increase of at least 100 basis points in EBIT margin for FY23. Overall, I anticipate a more robust margin expansion in 2H23 as a result of several factors, including a reduction in inflation, an easy comp for COVID-only testing, fixed cost leverage as base business expands, and a reduction in R&D spending.

Segments

With respect to sub-sectors, medical sales increased 6.1% year-over-year to $2.15B, with Medication Management Solutions showing especially robust growth. Limitations in China and a tough comparison due to increased vaccine demand last year caused Medication Delivery to fall short of expectations. Nonetheless, Becton, Dickinson and Company did well internationally in both catheters and vascular care. The success of Medication Management Solutions was largely attributable to the growing popularity of Connected Medication Management and the rapid development of Pharmacy Automation in Parata. The increased volume of infusion sets and dispensing installations that occurred last year as a result of COVID-19, however, stifled expansion. Finally, Pharmaceutical Systems also performed well, with another quarter of double-digit growth supported by a leadership position in rapidly expanding markets such as biologic drugs and vaccines.

Integrated Diagnostic system and BioSciences helped drive the 3.3% increase to $1.3 billion in sales in the Life Sciences sector. Sales of interventions increased by 5.6%, reaching $1.13 billion. As far as I can tell, growth is fairly even across regions, with the exception of China, which is actually contracting. However, management anticipates China to grow by double-digits this year, which I think indicates management's confidence.

Guidance

The increased guidance stands out to me as the most unexpected and crucial learning. Based on the improved business outlook, management has increased their midpoint growth target for FY23 by 50 basis points to 6.25% (mostly due to FX). However, the positive effect of the change in FX rates is almost completely cancelled out by the decrease in sales of COVID testing, which has a higher margin. More importantly, the numbers are heading in the right direction, which is promising when factoring in the positive effects of conservative FX assumptions and Alaris's potential contributions.

Valuation & model

Supposed valuation remains at the current level (20x NTM P/E), I believe there is ~21% upside to Becton, Dickinson and Company share price. In my baseline scenario, I assume that multiples do not increase from their current levels, and I forecast future constant currency revenue growth to be in the mid single-digits. Going forward, margins should grow by around 100 bps annually. The approval of Alaris in 2H23 and an increase in the number of patients treated are two important presumptions.

Summary

Quarterly performance was strong, in my view. Becton, Dickinson and Company base business is improving, EPS is growing, and there is also the possibility of future growth when Alaris's gets approved. Although it's encouraging that guidance was increased, it's not great news that most of the outperformance appears to be driven by FX movement. That said, overall, Becton, Dickinson and Company numbers are improving, underlying trends are shaping up favorably, and the valuation is reasonable.

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