C.R. Bard: High Valuation As Litigation Risks Outweigh News Of Medafor Acquisition

Aug.19.13 | About: C. R. (BCR)

Shares of C.R. Bard (BCR) offer little appeal at the moment, despite announcing a nice strategic deal to bolster its surgical specialties capabilities.

While the deal looks nice, it hardly makes a dent into Bard's operations. The high current valuation, accompanied with uncertainty regarding litigation cases, makes me hesitant to invest while shares are trading near all time highs.

The Deal

C.R. Bard announced that it has entered into a definitive agreement to acquire privately-held Medafor. C.R. Bard will pay some $200 million for the developer and supplier of plant based hemostatic agents. The company will pay potentially $80 million more if Medafor meets specified revenue milestones through June of 2015.

The deal should boost Bard's surgical specialties within the Davol subsidiary of the firm. Medafor currently markets Arista MPH Hemostat, which is an adjunctive hemostatic agent to control bleeding when conventional means are ineffective.

Besides Arista, Medafor has a range of other products in the pipeline which will expand the use of the clinically proven hemostat to control bleeding. Surgical hemostats are used to control bleedings during operations, giving the surgeon greater visibility, and reduce complications after the operation.

The deal will add some 1% in revenue growth for 2014, which implies annual sales of Medafor could be around $30 million. This means C.R. Bard would be happy to pay 6.7 times annual revenues for the firm. The deal will result in a few cents dilution to 2013's adjusted earnings per share and be neutral to earnings per share in 2014.

The deal has been unanimously approved by the board of directors of both companies and is expected to close later this year. The deal is subject to shareholder approval by Medafor's shareholders, normal closing conditions and regulatory approval.

Valuation

C.R. Bard ended its second quarter with $859 million in cash and equivalents. The company operates with $1.48 billion in total debt for a modest net debt position of around $600 million.

Revenues for the first six months of the year came in at $1.50 billion, up 1.9% on the year before. The company reported a $70.9 million loss compared to last year's profits of $272.6 million. The losses are largely explained by $292.4 million pre-tax charges for product liability matters and other litigation matters.

At this rate, annual revenues could come in around $3.0 billion while adjusted net earnings would be around $500 million.

Trading around $113 per share, the market values C.R. Bard at $9.0 billion. This values the firm's operations at 3.0 times annual revenues and roughly 18 times annual earnings.

C.R. Bard pays a quarterly dividend of $0.21 per share, for a annual dividend yield of merely 0.7%.

Some Historical Perspective

Over the past decade, shares of C.R. Bard have nearly tripled. Shares have steadily risen from $40 in 2003 to all time highs of $117 in recent weeks. After a modest correction, shares are now exchanging hands at $113 per share.

Between 2009 and 2012, C.R. Bard has increased its annual revenues by a cumulative 17% to $2.96 billion. Net earnings rose by 15% to $540 million in the meantime. Earnings per share have grown much faster after Bard retired a quarter of its share base outstanding over the time period.

Investment Thesis

Investors in C.R. Bard could use some good news for a change.

Shareholders first had to deal with the large second quarter loss on the back of litigation provisions, among others. Last week, the company was ordered to pay a woman $2 million as the company hid flaws of its vaginal-mesh implants, according to a jury. This might be just the start as Bard faces some 8,000 other claims from women over its Avaulta devices.

The good news is obviously the strategic and nice addition of Medafor. Executives at Bard stress that the acquisition of Medafor makes perfect sense as the company operates in a growing global market, currently totaling $1.4 billion per year. With the proprietary technology platform and increased resources, Bard hopes to gain market share and boost sales of Medafor's products.

Unfortunately, how nice the deal might be, it hardly makes a dent in Bard's current operations. I'm not really impressed with the operational growth of the company, although share buybacks have boosted earnings per share recently. The resulting earnings per share growth has been underlying the strong performance of Bard's shares in recent years.

Trading around 18 times normalized earnings, excluding the large litigation provisions, and paying out a mere 0.7% dividend yield, I see little appeal.

While the provisions might prove to be adequate, there are always downside risks with litigation matters and I don't think the current valuation is appealing enough. With shares trading near all time highs the margin of safety ahead of possible bad news is simply not large enough.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.