Becton, Dickinson and Company (NYSE:BDX) is a global medical technology company engaged in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. BD's operations consist of three business segments: BD Medical, BD Diagnostics and BD Biosciences. Becton, Dickinson and Company is a dividend aristocrat that has raised its dividend for 40 consecutive years.

A 10-year summary of Sales, Earnings Before Interest and Tax (EBIT), Earnings per share (EPS), yearly high and low stock price, corresponding high and low P/E (calculated by dividing the high and low price by the EPS for the year), and average P/E (average of high and low P/E) is shown below.

**Key 10-year data for Becton, Dickinson and Company**

Year | Sales (in Millions) | EBIT (in Millions) | EPS | High Price | Low Price | High P/E | Low P/E | Average P/E |

2011 | 7828.9 | 1716.26 | 5.59 | 85.21 | 66.89 | 15.2 | 12.0 | 13.6 |

2010 | 7372.33 | 1661.16 | 4.9 | 79.21 | 61.18 | 16.2 | 12.5 | 14.3 |

2009 | 6986.72 | 1578.59 | 4.73 | 91.21 | 61.13 | 19.3 | 12.9 | 16.1 |

2008 | 6897.62 | 1489.69 | 4.27 | 84.95 | 70 | 19.9 | 16.4 | 18.1 |

2007 | 6282.84 | 1185.41 | 3.3 | 73.58 | 58.86 | 22.3 | 17.8 | 20.1 |

2006 | 5738.02 | 1125.9 | 3.18 | 60.72 | 50.53 | 19.1 | 15.9 | 17.5 |

2005 | 5340.83 | 1037.53 | 2.73 | 57.83 | 46.5 | 21.2 | 17.0 | 19.1 |

2004 | 4934.75 | 752.87 | 2.21 | 40.5 | 29.6 | 18.3 | 13.4 | 15.9 |

2003 | 4463.51 | 721.96 | 2.1 | 38.22 | 25.01 | 18.2 | 11.9 | 15.1 |

2002 | 3960.36 | 627.47 | 1.79 | 38 | 30.14 | 21.2 | 16.8 | 19.0 |

From these data, we can plot Sales, EBIT, and EPS versus Year, as shown in the chart below.

**Sales (in Millions), EBIT (in Millions), and EPS versus Year for Becton, Dickinson and Company, 2001-2010**

As evident from the above chart, BDX has demonstrated quite predictable sales and earnings over the past 10 years, allowing us to predict EPS in the near future, say in five years (i.e. Year 2016), using the linear regression equation for EPS = 0.4312 (2016) - 861.63 = 7.9962.

A conservative average P/E estimate for the stock can be obtained as follows:

**Signature P/E:** A well established stock has a signature P/E, an average P/E it commands in the market based on its business. We calculate this by averaging the Average P/E over the past 10 years, excluding any outliers (data points that fall significantly beyond the other data points). There are no outliers, so we average the Average P/Es from all ten previous years to arrive at a signature P/E of 16.9.

**High P/E estimate:** a conservative high P/E estimate can be calculated by averaging the five lowest High P/Es of the 10 High P/Es from the past 10 years. The 5 lowest High P/Es from the past 10 years are 15.2, 16.2, 18.2, 18.3, and 19.1, which average 17.4.

**Low P/E estimate:** a conservative low P/E estimate can be calculated by averaging the five lowest Low P/Es of the 10 High P/Es from the past 10 years. The 5 lowest Low P/Es from the past 10 years are 11.9, 12.0, 12.5, 12.9, and 13.4, which average 12.5.

**Average P/E estimate**: this takes the average of the High P/E estimate and the Low P/E estimate, as calculated above, to give a conservative estimate of an average P/E for the stock we can expect. Averaging 17.4 and 12.5 gives us 15.

**Target Price**

Multiplying our EPS projection for 5 years hence by the average P/E estimate gives us a projected average price for the stock: $7.9962 * 15 = $114.81. Compared with the current price of $74, this represents an annual stock price return = 11.6%. When we add in the 2.4% dividend yield, the total return expected is an annualized 14%, which means an investment in BDX today is expected to double in a little over 5 years.

Given a beta = 0.6 for BDX, a risk-free rate = 2% (using the yield on 10-year Treasury bond as a benchmark), and estimated risk premium of about 5% for the general stock market, we have a discount rate = 2% + 0.6*(5%) = 5%. Applying this discount rate of 5%, our projected price of $114.81 in 5 years translates to a *target price = $90* in today's dollars, which is about 22% upside potential compared to the current price of $74 for the stock. For a good margin of safety, investors are well advised to buy only if the current price is at least 20% below the target price, which means a price of $72, which is very close to the current price of $74.

**Market Expectation**

What is the market's expectation of BD's growth rate given its current market price = $74? Since stock price = dividend * (1 + growth rate) / (discount rate - growth rate), we have growth rate = ((stock price) * (discount rate) - dividend) / (stock price + dividend). Plugging in stock price = $74, dividend rate = $1.80, and discount rate = 5%, we get growth rate = 2.5%. This seems low, given that BD has grown its revenue by 6.4%, its earnings by 9.2%, and its dividend by 14% annually over the past 5 years. While the growth rate is supposed to slow down a bit as a company matures, a market expected growth rate of 2.5% suggests that the stock is currently undervalued. A target price of $90 would imply a 2.9% growth rate expectation, while a projected price of $114.81 in five years, if reached today, would imply a 3.4% growth rate expectation. Low market expectations bode well for the stock, because it makes it more likely for the company to beat these expectations.

**Current P/E Compared With Signature P/E**

As an additional consideration, we should also determine how the stock's current P/E compares with its signature P/E, since established stocks tend to revert back to their respective signature P/Es over the long term. Current EPS = 5.59, giving us a current P/E = 13.2. This is 78% of the stock's signature P/E of 16.9, which suggests the stock is currently undervalued. In general, we should look to buy when the current P/E is 80% or less of the stock's signature P/E.

**Risk Index**

Lastly, we calculate the Risk Index, calculated as (Current Price - Forecast Low Price)/ (Potential High Price - Forecast Low Price) to give an estimate of the risk: reward ratio. Risk index less than 20% is desired, which gives us +200% potential returns for every risk of 50% loss we assume.

The Forecast Low Price is calculated by multiplying the Low P/E estimate by the Forecast Low EPS, to give a conservative estimate of low price for the stock in 5 years, assuming zero EPS growth and low valuation. Forecast Low EPS is estimated by averaging the EPS over the past 5 years. For growth stocks with predictable earnings growth, EPS in 5 years should not be any lower than this conservative estimate. For BDX, the forecast low EPS is equal to 4.558, so the Forecast Low Price = 12.5 * 4.558 = $57.14.

The Potential High Price is calculated by multiplying the High P/E estimate by the projected EPS in 5 years, giving us a price target in 5 years should the stock command a high P/E. For BDX, this equals 17.4 * 7.9962 = $133.49.

Thus, the Risk Index = ($74 - $57.14) / ($133.49 - $57.14) = 22%. Since this close to 20%, we have a favorable reward to risk ratio at the current price. This would favor a Buy at or below the current price.

Some risk factors to consider: macroeconomic risks, such as Europe's debt crisis; foreign currency exchange risks, as the company is multi-national; federal healthcare reforms; changes in reimbursement practices; price volatility in raw materials; reliance on new product developments; competitive medical technology industry; potential interruption in supply chain; pending lawsuits; patent expirations; government regulations.

**Conclusion**

Becton, Dickinson and Company, currently selling at $74, has a target price = $90. Its current P/E of 13 is below the stock's historic P/E average of 16.9, and its downside risk outweighs its upside potential. Therefore, I rate the stock a **Buy** at the current price.

**Disclosure: **I am long BDX.

*Disclaimer: Use this information as a starting point for your own due diligence, before buying any stock. If you do buy, be sure to read any annual reports (10-K) and quarterly reports (10-Q) to ensure that the fundamentals remain good and the stock is on target to reach its projected price. After holding for five years, repeat the analysis detailed in the article to decide whether to continue to hold, add, or reduce your position.*