By Carson Ko
Becton, Dickinson and Company (BDX) is a global medical technology manufacturer. BDX develops, manufactures and sells medical devices such as needles, syringes, prefillable drug delivery system, specimen and blood collection systems as well as analysis and research machinery for pharmaceutical and biotechnology companies.
Becton, Dickinson and Company’s clients range from consumers, retailers, blood banks, clinical laboratories, hospitals, and Governmental and nonprofit public health agencies. BDX’s major competitors include Baxter (BAX), Covidien (COV), Boston Scientific (BSX), C.R. Bard (BCR), Hologic (HOLX), Gen-Probe (GPRO) and Retractable Tech (RVP). Below is a chart (click to enlarge) showing the trailing twelve months revenue comparison among BDX’s competitors. Although BDX is not the biggest fish in the pond, with 17% of the industry, it has a long history within the segment and has been able to maintain consistent revenue growth close to 10% annually.
Diversified Revenue Stream:
BDX’s operations are separated into three main divisions: BD Medical, BD Diagnostics, and BD Bioscience. Although BD Medical is still the major contributor of the company’s income (50%), each of the divisions brings in a significant piece of revenues to diversify any regulatory impacts. All the divisions were able to sustain a good amount of growth in the past few years despite the globe economy slow down.
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For the last 10 years to 2008, all three divisions were able to secure high single digit to mid-double digit growth. Due to the slowdown in 2009, growth fell to a 0.1 percent combined. However, the growth rate since has returned to approximately 5%.
Overall, BDX’s revenue has been increasing at a higher rate in the international market (see table below). For the past few years, BDX’s products have been selling more and more to areas other than United States. Also, their emerging market sales, which account for ~22% of sales, grew about 13% compared to the prior year. The company also sees Strong growth in the Asia Pacific region versus prior years, led by China at ~27%.
Stable Revenue, Earnings and Cash Flow Growth
Becton, Dickinson and Co has been on many dividend income screens for a while due to their ability to consistently increase dividends for the last 10 years. At the time of this writing, their dividend yield has reached 2.3 percent. While this is not high among dividend payers overall, it is higher than others in their industry.
This gives investors exposure to a fast growing industry but also an income stream from dividends. The company has consistently maintained a payout ratio in the upper 20 percent range. Combined with continuous revenue and free cash flow growth, BDX should continue to provide stable dividends and stock appreciation.
BDX has strong brand recognition in hospitals, research labs and other clinical areas. They also have sizeable infrastructure to fend off new competition. Although surgical products are commodity-like and mainly compete on price, BDX was able to maintain and increase its gross margin percentage and operating margin percentage in the past 10 years (see table below, click to enlarge). The company has already proven itself to be competitive even in a recession.
Since BDX has more than 55% of their revenue coming from foreign countries, their earnings are subject to exchange rate fluctuation. Under the current economy, a stronger dollar will hurt future earnings and affect valuation if there is no hedging program. Also, higher oil and resin pricing will increase BDX’s bottom line and eat into their profit margin. Western Europe’s market growth will continue to be a challenge with the current financial outlook. Healthcare reform also adds a layer of uncertainty to future forecast.
The aging population and increase in life expectancy in the developed world will continue to drive the sales growth of the medical device industry. Emerging market countries are great opportunities for additional unexplored revenue streams. Continued medical improvements and advancements in technology will also help favor industry growth.
Accounting for the current European economic situation and forecasting a stronger US dollar exchange rate, I anticipate the BD Medical division will have a slower 4% revenue growth while BD Bioscience and Diagnostic’s revenue stream could grow at 5% annum after foreign exchange adjustment. After 5 years, growth rates may return to 5% for BD Medical and 6% for the other two divisions provided the company continues its rapid growth in emerging markets. We have seen SG&A spending increases but they reasonable and in-line with expectations.
I like Becton because of its discounted value and defensive nature. Even with a gloomy outlook in Europe and future dollar appreciation, the company shows respectable upside potential. Having an industry-beating dividend yield of +2% only adds to its attractiveness. The company has already scheduled November 9th for its 4th Quarter result release. Analysts on the street don’t expect much change on management’s earning guidance. For those looking for stability in a time of uncertain market forces, BDX is at its historically low P/E and merits further consideration.