BDX - Following The Q4 Results Becton Dickinson and Company Is Still A Hold

2023-11-13 18:11:41 ET

Summary

• Becton, Dickinson, and Company is a healthcare company with strong fundamentals and a history of dividend growth.
• The company has shown robust execution of its 2025 strategy, positioning it for sustained growth and innovation in the medical technology space.
• However, there are risks to the investment, including slower EPS growth, competition, and a lack of margin of safety in the current valuation.

Introduction

In this article, I will look at a company I already have in my portfolio: Becton, Dickinson and Company ( BDX ), which is part of the healthcare sector. The healthcare sector is attractive, particularly Becton, Dickinson, and Company. I own shares in the company and analyzed it in August of 2022. I found it to be a HOLD due to the valuation.

Since then, the share price has declined a bit. I believe that the Q4 results that were published on November 9th are an excellent opportunity to revisit the company, as the share price dropped by over 10% following the announcement.

Seeking Alpha's company overview shows that:

Becton, Dickinson, and Company develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products for healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry, and the general public worldwide. The company’s BD Medical segment provides peripheral intravenous and advanced peripheral catheters, central lines, acute dialysis catheters, vascular care and preparation products, and more. Its BD Life Sciences segment offers specimen and blood collection products, automated blood and tuberculosis culturing, molecular testing, microorganism identification, and drug susceptibility, liquid-based cytology systems, and more. The company’s BD Interventional segment provides hernia and soft tissue repair, biological and bioresorbable grafts, biosurgery, and more.

Fundamentals

The revenues of Becton, Dickinson, and Company have more than doubled over the last decade. They have increased by 133% in a decade. This combines organic growth as the company invests in the pipeline and inorganic growth as it acquired companies like CareFusion in 2015. In Q4 2023, the company reported a 7% increase in sales, showing that it is well-positioned to grow. In the medium term, as seen on Seeking Alpha, the analyst consensus expects Becton, Dickinson, and Company to keep growing sales at an annual rate of ~5%.

The EPS (earnings per share) of Becton, Dickinson, and Company have increased by 16% over the same period. However, healthcare companies tend to have non-cash expenses. Therefore, looking at the adjusted EPS is more revealing. The adjusted EPS increased by 96% over the last decade. The EPS grew slower than the sales despite an increase in the margins due to the rise in the number of shares associated with the company's acquisitions. In Q4, the company reported EPS aligned with expectations, and 2023 saw a 7.5% increase in EPS. In the future, according to Seeking Alpha, the analyst consensus expects Becton, Dickinson, and Company to keep growing EPS at an annual rate of ~8% in the next three years.

The company had just become a dividend king yesterday when it increased the dividend for the 50th year. That shows significant devotion to growing returns for shareholders. The company pays a dividend that has grown constantly and with an initial yield of 1.6%. The latest increase was 4.4%, putting the payout ratio around 70% when using GAAP EPS. When using the non-GAAP EPS, the payout ratio is 31%, which makes the dividend even safer. Therefore, investors are likely to be able to rely on the company for income.

In addition to dividends, companies tend to return capital to shareholders via buybacks. These share repurchase programs support EPS growth by lowering the number of shares. Becton, Dickinson, and the company have seen the number of shares increase by 50% over the last decade. This is due to very few buybacks during that period, the issuance of shares for employee compensation, and, more importantly, to pay for acquisitions with stock.

Valuation

The P/E (price to earnings) ratio of Becton, Dickinson, and the company stands at 17.26 when using the current forecast of analysts for 2024. Paying 17 times for a company growing at an annual rate of 8% may look decent, but we must remember that rates are higher today than during the last decade. Therefore, while the current valuation is the lowest we have seen over the previous decade, the company is not attractive and fairly valued at best.

The graph below from Fast Graphs emphasizes that Becton, Dickinson, and Company shares are not attractively valued. The average P/E ratio of the company was 18.6 over the last two decades. It is slightly higher than the current future P/E ratio of the company. However, the forecasted growth rate is also lower today than the average. 9.5% is the average growth rate, and 8% is the medium-term annual forecast. When adding the higher rates, which imply lower valuations, shares of BDX are not attractively valued.

Opportunities

Becton Dickinson's robust execution of its 2025 strategy positions it as an attractive investment opportunity. The company has demonstrated a commendable trajectory, with revenue growth increasing from 5% in 2021 to an impressive 8% by 2023. Furthermore, BD has exhibited a strong commitment to operational efficiency, as reflected in the notable improvement of its operating margin from 19.6% in 2021 to an impressive 23.5% in 2023. This successful execution signifies financial health and showcases BD's strategic foresight and adaptability in a dynamic healthcare landscape .

Investing in BD offers exposure to a company at the forefront of medical technology innovation. Over the past two years, BD has introduced 52 essential products, underscoring its dedication to cutting-edge solutions. Notable advancements include the needleless blood draw technology, addressing a critical need for patient comfort and healthcare professional safety. Moreover, BD's promising pipeline, featuring innovations like cell sorters and connected care capabilities, positions the company for sustained growth .

One of BD's key strengths lies in its diverse portfolio of solutions and a significant global footprint. The company's sales demonstrate a robust diversification strategy, with 43% of its revenue generated outside the US. This mitigates regional economic risks and positions BD to tap into diverse markets and capitalize on global healthcare needs. With a broad range of products spanning medication management, infection prevention, and diagnostic systems, BD is well-positioned to leverage its offerings for growth.

Risks

A significant risk for potential investors in Becton Dickinson is the comparatively weak forecast for 2024. The company's guidance indicates a modest 5% increase in earnings per share, falling short of market expectations, which hover around an 8.5% increase. Such discrepancies between company guidance and analyst projections can erode investor confidence and potentially lead to market volatility. Investors may be concerned about the company's ability to meet growth expectations, which could impact the stock's performance and overall shareholder value . Even with the promising strategy, slower execution poses a risk.

Becton Dickinson faces stiff competition from established peers like Abbott and Medtronic and agile startups entering the medical technology space. The competitive landscape poses a risk as rivals may introduce innovative products, secure vital partnerships, or adopt aggressive pricing strategies. BDX is active in very lucrative areas even after the spinoff of its diabetes care unit. The company may suffer from fierce competition from vascular access to medication management as it invests in more profitable segments. This competition could potentially impact market share, pricing power, and overall profitability for Becton Dickinson. That may be extremely painful after it achieved impressive operating margin expansion.

The prospect of higher interest rates poses a risk for Becton Dickinson investors. With a current P/E ratio of 17.2 (before analysts react to the company's forecast), there may be limited margin of safety, making the stock vulnerable to short and medium-term losses if interest rates rise. Higher rates can attract investors to alternative investments, and the medical technology sector, often perceived as defensive, may face increased scrutiny.

Conclusions

To conclude, Becton Dickinson and Company is a blue chips company that became a dividend king. It grows its sales gradually, and the EPS grows with it. It then uses the earnings to invest in new technologies and pay investors a dividend that has been growing for 50 years. The company has several growth opportunities that will be able to support growth efforts in the foreseeable future.

However, there are risks to the investment. Slower EPS growth as seen in the 2024 outlook, competition, and the lack of margin of safety. The current valuation, with a P/E ratio of 17, leaves us as investors with a tiny margin if the company fails to execute. Therefore, at the current valuation, shares are a HOLD, and I believe they can be a BUY when the forward P/E reaches 15 based on the current forecast, implying a share price of $190-$195.

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