The healthcare sector should always have a prominent place in any investor's portfolio. The sector has not only maintained the second highest return since 1986, but also has strong defensive characteristics during periods of economic weakness. Last month I highlighted two seasoned healthcare companies that should have a place in a diversified stock portfolio; Zimmer (ZMH) & Roche (RHHBY.OB). In addition to Zimmer and Roche, Becton Dickinson (BDX) also stands out within the sector for its dominant market position, high level of international sales, excellent sales per share expansion, and impressive dividend growth. The firm is positioned to benefit from several healthcare spending trends in the next decade including an increased focus on safety in the delivery of drugs, diabetes prevention, and enhanced accuracy in testing.
As a review, here is my 9 key criteria for consideration;
Key Selection Criteria - Healthcare
- A market capitalization over $10 billion.
- A leadership position within a growing industry.
- A dominant, or large, market share within its product mix.
- A strong position internationally, especially in emerging markets.
- A strong balance sheet and high credit rating.
- A high free cash flow number.
- A low historical relative valuation as measured by price/sales ratio.
- A strong dividend growth rate.
- A catalyst of new revenue opportunities.
Becton Dickinson is a large-cap, diversified healthcare firm, with a current market capitalization of $15.3 billion.
Company & Leadership
Becton Dickinson is the world's largest manufacturer and distributor of medical surgical products, including needles, syringes, and sharps-disposal units. The company also manufactures diagnostic instruments and reagents, as well as flow cytometry and cell-imaging systems. Becton Dickinson consists of three primary segments: BD Medical, BD Diagnostics and BD Biosciences. BD Medical accounts for just over half of all revenue for the company. Its products include traditional needles and syringes, intravenous catheters, safety-engineered and auto-disable devices, prefillable drug delivery systems, and prefilled IV flush syringes. The company produces over 29 billion syringes per year which translates into a nearly 70% global market share. Scale of operations in this business is crucial due to the capital intensive nature of the manufacturing process. Revenues were $1.070 billion in the previous nine months (+2%; +6% cc)
BD Diagnostics is a leading provider of products for the safe gathering and transport of diagnostics specimens, as well as instruments to accurately sense a broad range of infectious diseases and cancers. These include integrated systems for specimen collection, safety-engineered blood collection products, and molecular testing systems for infectious diseases. Becton has a sturdy market share within these major diagnostic areas. BD Diagnostics recorded revenues of $642 million (32% of total revenues), up 1.7% in the third quarter of fiscal 2012. Becton plans to launch several new products in this arena over the next twelve months.
The BD Bioscience segment produces research and clinical tools that make possible the study of cells to gain a better understanding of normal and disease processes. This is the smallest of Becton Dickinson's segments in terms of revenues, contributing 12%. This segment consists of two major units; Cell Analysis and Discovery Labware. The primary customers served by BD Biosciences are research and clinical laboratories, academic and government institutions, pharmaceutical and biotechnology companies, hospitals and blood banks. Its prime product lines include fluorescence-activated cell sorters and analyzers, monoclonal antibodies and kits for performing cell analysis, and cell imaging systems. The biosciences unit was once again dragged down year over year by the academic and government spending pullback. Becton did manage to offset the U.S. weakness in this business with positive (currency-adjusted) growth overseas.
Becton Dickinson 4-year International Sales
International revenue has become a superior portion of Becton's overall revenue. It now accounts for 57% of total revenue. Currency impact has also been stark. Although international growth in the table above from 2011 to 2012 was minimal, on a constant currency basis it jumped by over 6%. Emerging market growth accounts for 23% of total international revenue and grew by 11% on a constant currency basis in the previous year. For fiscal year 2011, Becton Dickinson had larger international revenue growth of 9.5% compared to domestic revenue growth 1.9%. Growth in emerging markets is one the Becton Dickinson's key objectives. The continuous expansion in emerging markets will drive international sales to over 60% of revenue by 2015.
|FCF||Shares Outstanding||Share % Repurchase|
In May of this year, Standard & Poors raised its short-term credit rating on Becton Dickinson to A-1+ from A-1. Citing the firm's exceptional liquidity, S&P also affirmed it's A+ long-term corporate credit rating. Becton has continued to demonstrate strong unswerving free cash flow (FCF) on a yearly basis despite a high level of spending on R&D, continued share buybacks, and increased dividends. Shares outstanding have been reduced by 13.3% since 2009. Becton Dickinson has repurchased over $3 billion in stock in the previous two years. In the previous six years, Becton has returned over 80% of its net income back to shareholders through stock buybacks and dividends. The most recently completed ($1.5 billion) buyback plan was partially funded by the issuance of debt last year. Although S&P continues to view Becton favorably despite the debt issuance, competitor Moody's Investors Service placed the investment-grade ratings of Becton Dickinson on review for a potential downgrade. Moody's was concerned that the medical-device company's cash flow isn't likely to improve enough to offset higher debt levels. Despite Moody's concerns, I feel the debt swap for stock was worthwhile as Becton's cash position remain strong. Becton currently maintains over $1.6 billion in cash on the balance sheet. Earlier this year, Becton confirmed a $730 million deal to sell the bulk of its lab-products business to Corning Inc.(GLW). This sale offset some of the risk associated with Becton's ability to fund acquisitions and continue a buyback program in 2013. On the August conference call, CFO David Elkins commented that in 2013 buybacks should be in the $400 million and $600 million range. The net proceeds from Corning in the lab sale would be $500 million, which would cover the entire buyback for 2013. One area of concern for Becton is the new device tax, expected to cost the company approximately $50 million in 2013 if Obamacare remains in force. However, this tax is less than 5% of the free cash flow that Becton will generate over the next 12 months.
As for relative valuation, Becton is trading toward its lower range in history. Becton has traded at a price/sales ratio range of 1.9 to 3.3 over the preceding six years. The highest price/sales ratio in the past decade occurred in 2007.
|Date||Price/Sales Ratio||Sales Per Share|
|Sept. 30, 2012||1.9||39.25|
|Sept. 30, 2011||2.3||36.44|
|Sept. 30, 2010||2.7||32.08|
|Sept. 30, 2009||2.6||30.2|
|Sept. 30, 2008||2.2||29.44|
|Sept. 30, 2007||3.2||26.08|
The average price/sales ratio for Becton has been 2.6. Over the previous five years, based upon total sales per share growth, Becton has advanced SPS by a compound rate of 8.5% per year. This was aided no doubt by the annual buybacks accomplished by Becton each year. If buybacks continue at a moderate pace of $500 million a year and revenue continues to accelerate at a 5% rate, sales per share can continue to grow at a more modest pace of 7% (cc basis). At this pace, Becton's investors could see sizeable capital gains. Based upon a return to a 2.6 price/sale ratio, my expected price for Becton would be $125 a share within a three year time frame. This would result in a gain of over 60%.
|2015 SPS Projected||48.08|
Becton announced a 9.8% increase to its dividend last November, marking the 40th consecutive year this premier medical technology company has given its shareholders a raise.
|Becton's 5-year dividend history|
|Date||Dividend Per Share|
Becton's growth rate in dividends is not only consistent through good and bad economic times, but also above the market (10.5% annualized). Becton's management has stated it will continue the strong dividend policy put in place in 1972. One item of note is that Becton continues to generate the majority of its cash outside of United States. More than 80% of its current cash balance resides outside the states. However, the cash flow the company generates within the borders is enough to cover the increased dividends. Payout ratio for Becton has consistently remained in the mid-30s, thus there is considerable opportunity to maintain a higher payout policy if needed.
Future Catalysts and Pipeline
Becton should be able to cultivate overall sales at a moderate single digit pace. In the previous five years, Becton has advanced revenue by over 5% per year on a constant currency basis. Becton targets new products along with niche acquisitions to maintain its growth projections. In March 2011, Becton Dickinson acquired Accuri Cytometers for $205 million cash. Accuri is a manufacturer of affordable, personal flow cytometers for researchers. Becton aims to expand the market for the cell-analyzing devices to professionals who typically have not used them. The acquisition enables Becton to market and sell the flow cytometer to researchers studying a wide range of scientific disciplines that have not traditionally used flow cytometer. In August 2011, Becton acquired Carmel Pharma AB, a Swedish company, for $287 million cash. Carmel manufactures the BD PhaSeal System, a closedsystem drug transfer device for the safe handling of hazardous drugs that are packaged in vials. In July 2012, Becton announced a deal to buy California-based health care company Safety Syringes, Inc. The acquisition of Safety Syringes will boost Becton Dickinson's heath care worker safety products portfolio. Total international safety product revenues represented 40% of Becton's overall company growth in 2011, increasing to $755 million.
Revenues from new products in year 2011 comprised about 8% of total revenues, up from only 6.2% in 2008. The increased R&D spending by Becton over the preceding five years is now bearing fruit. The company indicated in the November 2011 analyst day meeting that it hopes to make new products 18% of total sales by 2014. The company's products are benefiting from unsafe injection practices, which continue to lead to disease outbreaks. Becton is at the forefront of making its product safer. One innovation is the syringe that is automatically disabled after one use. Currently, Becton only sells its auto-disabled syringes in developing countries, where unsafe injections kill an estimated 1.3 million people a year ( according to the World Health Organization). In the U.S., Becton markets several other products aimed at making injections safe. Its prefilled heparin and saline syringes remove the additional infection risk of drawing the fluid into the syringe The total syringe market (disposable and reusable) could reach $11.8 billion by 2017, with much of that being stimulated by the prefilled syringe sector (a group that includes prefilled pen injectors, auto-injectors, and needle-free injection devices). The global market for Special Purpose Needles is projected to reach $4.0 billion by 2017. Becton's Ultra-Fine Nano Pen Needle with PentaPoint Comfort was recently released in this category. This new product will enhance the portfolio of diabetes care products under Becton's BD Medical.
The global catheter market was $21.2 billion in 2011. This global market is projected to increase at a compound annual growth rate of over 8%, reaching a value of $32.1 billion by 2016. TriMarkPublications.com cites in its newly published "Catheter Markets" report that the world market could catapult to $43.8 billion by 2018. In the second quarter of fiscal 2012, Becton, Dickinson commercialized its shortest needle for insulin syringes, named BD Nexiva Diffusics Closed IV Catheter System. Becton plans to launch several other new products in this arena over the next twelve months. Becton recently received FDA clearance for its MAX MRSA molecular test in the United States. The company also plans to launch molecular technology product BD Viper Trich in the European Union in the latter part of 2012. The U.S. launch of the product is not expected before the fourth quarter of fiscal 2013. Other launches for 2013 include BD Max C. Diff, BD Viper Trich, and BD SurePath Plus. Also in 2013, Becton will launch the BD Women's Health automation platform and HPV genotyping assay (EU).
In the bioscience division, new products include the BD FACSVerse, which is in the research flow category; the BD Accuri C6 personal flow cytometer from the Accuri Cytometer acquisition; and the BD FACSJazz. The company expects these three product lines to add 3% to overall revenue growth in the division. In 2013 the firm will launch a portable point-of-care CD4 analyzer as well. Overall, Becton's new product development pipeline seems brighter than ever, which will allow it not only to break into new markets, but also strengthen its position in syringes and diagnostics. The firm is trading at its lowest relative value (SPS) in the past decade with a strong history of R&D success. It is a very stable company that maintains an exceptionally low beta (0.64) and a growing dividend. Stock up.