Description

If you are looking for a good business at a cheap price, Becton, Dickinson and Company (ticker: BDX) fits the bill.  At the current $75 price, BDX stock sells for only 12.6x our estimate of CY 2012 earnings and under 13x our estimate of free cash flow.  As was pointed out by andrew109 in his VIC writeup from March 2010 with the stock then at $79, BDX has a long history.  BDX entered its core business of manufacturing needles and syringes in the early 1900s – and over the ensuing 112 years the company has successfully adapted to changes brought on by mass production, the development of disposable products, and the growth of safety-oriented devices.  After all of these changes over the years, BDX continues to be a leader in its primary markets. 

Much of Wall Street is bored with BDX because revenue growth has been subpar for the last few years (2009 +4%, 2010 +5%, 2011 +5%) and is likely to remain soft (+3-4%) for a couple more.  Organic revenue growth is set to decelerate to, say, 3% or so in 2012 as utilization and pricing headwinds have flared.  This rate is temporarily below the growth rate of a number “peers” in the medtech space.  The company’s investment cycle is not likely to turn out reinvigorated topline growth until 2014.  This year the company is also facing compression at the operating margin line due to higher cost of raw materials, acquisitions, and investment spending. 

However, it would be overly pessimistic to believe that revenue growth and margin expansion are permanently stalled.  This is a case where in all likelihood patience will be rewarded.  Remember that this is a company that has managed to find new growth avenues again and again over its 100+ year history.  The culture and operating discipline at Franklin Lakes have not gone up in smoke. 

Over 20% of sales are in the emerging markets – where BDX is ramping up investments.  BDX has excellent positions in both China and India that will power revenue growth for many years to come. 

In addition, we believe that, in keeping with its history, this company will find a way to develop products that boost the growth rate.  I would refer you to last Fall’s analyst day, where for the first time in over a decade the company provides details on an array of pipeline programs. 

It is true that the 7-9% revenue growth targets of the past are probably not going to be realized going forward.  BDX recently pulled away from the most recent target of 6.5%.  But 5% over an average three year period is reasonable in the future.  I will not rehash the 10K here, but for context be aware that BDX enjoys roughly 47% share in the Medical Segment (51% of sales), 45% share in the Diagnostics Segment (32% of sales), and 53% share in the Biosciences Segment (17% of sales).  These are strong market shares in businesses with plenty of growth left.

While we wait for these initiatives to unfold, BDX is simultaneously implementing cost programs – ReLoCo I & II, EVEREST, and Rekindle – that will produce bottom-line savings in 2013.  We expect that the company will be able to generate 30-50 bps of leverage to operating margins over the medium and long term.  BDX will buy back in the neighborhood of 8-9% (!) of shares in 2012 using $1.5 billion.

Layer on the above average ROIC metrics for BDX, and this company will be pumping out a lot of cash flow for years to come.  Put a market multiple on the $6.25-6.50 of normal earnings for the business, and this company is worth in the mid $90s per share at least.  Note that this is still a discount to the 16-17x multiple where the stock used to trade.

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