In a market that has offered up plenty of values in med-tech, investors may do well to draw lines between quality and value. There is no question that Becton Dickinson (BDX) is a very good (and very stable) company with substantial market share in a host of profitable sectors. The problem, though, is that there is no shortage of love for this name and no pressing need to buy the stock at current prices.
First Quarter Results Point To One Big Challenge
Perhaps the biggest issue for BD today is producing the sort of growth that it takes to get institutional investors excited and eager to push up the valuation. Reported growth in the fiscal first quarter was just 2.5%, which was at the high end of expectations, but not all that scintillating.
Growth was relatively well-balanced. The smallest division, Biosciences, was also the weakest, as growth was just about 1%. Medical and Diagnostics were relatively stronger, both growing about 3%. Encouragingly, two of the company's strongest business from a platform standpoint, diabetes and diagnostics, were also the strongest from a top-line perspective (growing 6% and 5%, respectively). At the same time, the 2% Med Surg growth was not so bad relative to low procedure counts and the numbers reported from the comparable units at Covidien (COV) and CareFusion (CFN).
It's hard to be quite so sanguine about the margin performance. Though broadly in line with expectations, gross margin fell more than two points, while reported operating income fell 13% on a greater than three-point contraction in operating margin.
The Challenge For Diagnostics - Get More Systems In The Field And Tests For The Systems
Molecular diagnostics is in the middle of an arms race, with BD, Cepheid (CPHD), Gen-Probe (GPRO), and Qiagen (QGEN) all working to both get their boxes in place in hospitals and labs and expand the menu of tests available. Cepheid has done quite well with its modular GeneXpert and offers a solid suite of tests for hospital acquired infections, while Gen-Probe's expensive ($250,000 list) Tigris offers a level of scalability and flexibilty that should appeal to customers with high-volume needs. By comparison, BD's BD Max is more in the middle - about the same price as the highest-end GeneXpert, and cheaper than Tigris, but at the cost of sample capacity.
List prices can be worked around with leasing and rentals; the real issue is expanding the menu of tests. BD is looking to roll out tests for MRSA, c.dif. and STDs, but the latter will be something of an uphill climb as Gen-Probe has nearly half of that market. Hospital infections will be a real battleground as well; BD has historically had about a third of the market, but both Cepheid and Gen-Probe want that share. At the same time, BD hopes to challenge Hologic (HOLX) in the cytology market and build on its roughly one-third share.
Tuck-Ins And Overseas Sales Probably Not Enough
BD has good international exposure and currently gets about 20% of its sales from emerging markets, but seeing healthcare spending here rise to same per-capita levels as the Western world is going to take a long time. Elsewhere, while management has talked about its desire for tuck-in deals, transformative M&A seems off the table for now. That's not such a bad thing, mind you, particularly as the valuations on molecular diagnostics and life-science technology companies (arguably the more probable targets for BD) have moved up so much.
If Becton Dickinson wants to accelerate its growth rate, it will have take some fairly substantial steps into the unknown. For instance, a lot of the company's "growth strategies" in diagnostics aren't so much about expanding into new areas of testing as they are about maintaining already significant market share into new testing technologies. A real acceleration in growth, then, would have to come from expansion into new markets like cancer diagnostics.
Sit Tight And Wait For The Opportunity
Becton Dickinson fared better than most in the healthcare sector slowdown, arguably due in part to the better reimbursement environment for diagnostics and strong positions in areas like insulin pens that aren't quite so economically-sensitive. On the flip side, BD may not be among the companies showing the strongest numbers as the sector recovers.
Couple that absence of near-term growth momentum with a fairly hefty valuation and BD is a pretty mediocre stock today. If I already owned it, I would certainly be happy to sit tight and collect dividends. For new investors, though, there are just too many healthcare businesses with compelling franchises and 20% or greater undervaluation. To them I would advise sitting tight, letting the market's love affair with BD cool a bit, and then buying in at a more compelling long-term valuation.