Medical device manufacturer C.R. Bard (NYSE: BCR) has never been really owned for its exceptional growth potential or its exciting product lineup. What it has been appreciated for, though, is years of excellent free cash flow production, consistent performance, and a largely defensive portfolio of assets that has generated some of the best returns in the sector. While a poor operating environment has shown that Bard too is mortal, investors may yet want to consider this stock as a conservative addition to their portfolio.
One Of The Best Of The Rest
A great deal of attention in medical devices goes toward major product categories like coronary stents, cardiac rhythm management, and orthopedics, with the occasional hot growth story like surgical robotics or transcatheter heart valves. Where Bard excels, though, is in the “other” - a broad of array of devices that address significant medical issues, but just don't capture quite as much attention.
Bard is well-balanced between vascular, urology, oncology, and “surgical specialties” which includes tools and products for fixation, hernia repair and irrigation. Along with Cook, Covidien (NYSE: COV), and to a lesser extent Medtronic (NYSE: MDT) and Boston Scientific (NYSE: BSX) is a leader in peripheral vascular care where it enjoys strong share in catheters, balloons, and stents. In fact, strong share is nothing new – Bard is #1 or #2 in about 80% of its addressable markets.
A Good History Of Internal R&D, Supplemented With Deals
Unlike Medtronic and Boston Scientific, Bard does not traditionally spend as much on R&D as a percentage of sales. Nevertheless, the company has a pretty remarkable record of strong internal development and a consistent pipeline of new products. Bard doesn't focus a lot of time or money on high risk/reward projects, which enables the company to leverage a lower relative spend into more incremental sales. Said differently, if Medtronic hits for the occasional home run, Bard is happy hitting for average and consistently getting on base.
All of that said, Bard has been an active acquirer of late. The company bought Clearstream for its complimentary stent and catheter products. In the case of Medivance and Lutonix, though, Bard is taking a bigger swing. Medivance is in the business of therapeutic hyperthermia, an area that has long seemed promising, but where Philips (NYSE: PHG) and ZOLL Medical (Nasdaq: ZOLL) have seen a more gradual market development.
Acquiring Lutonix was also an interesting move – Bard paid over $200 million for this company (with further milestone payments possible) and its drug-coated balloon technology. The development of drug-coated balloons has sometimes reminded me of a junior high dance – everybody seems to think it's a good idea, but a lot of people just stand around waiting for others to make the first move. If this technology works, though, it could be worth hundreds of millions a year in revenue and perhaps finally offer the solution to peripheral vascular disease that Bard, Covidien, and small companies like Cardiovascular Systems (Nasdaq: CSII) have long hoped to offer.
Lower Expectations Not Necessarily Permanent
When Bard management gave its guidance for 2012, Wall Street was less than impressed with the potential of sub-5% organic growth and margin pressures from these deals. The thing is, there's nothing really wrong with Bard that a healthier overall market won't fix. The company does not seem to be losing share to Covidien, Boston Scientific, or Johnson & Johnson (NYSE: JNJ) in its key markets and there are numerous product launches coming up in next three years. Moreover, Bard is well-positioned in treatment areas that favor two significant long-term trends – aging populations (which feed the vascular, oncology, and urology businesses) and less invasive approaches.
In a somewhat bearish scenario where future revenue growth is less than half of recent growth (and giving little credit to new products like the Lutonix Moxy balloon) and there's slight erosion in Bard's ability to produce free cash flow, these shares are still cheap enough to buy today. That sounds like a good risk/reward set-up for investors who themselves aren't swinging for home runs. Bard is not going to be the most dynamic stock out there, but the risk/reward balance seems to really be skewing toward Bard doing no worse than expected, with plenty of potential upside.