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Tim Travis is CIO of and is CEO of T&T Investment Management L.L.C. Tim currently possesses the series 3, 7, 63, and 65 licenses, and he works actively in the field of investment management. Both Optimi Trading and T&T Investment Management L.L.C are investment... More
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Optimi Trading
  • June 18th 2010- BDX Covered Call 0 comments
    Jul 2, 2010 12:46 PM | about stocks: BDX
    JUNE 21, 2010 BY


    1.)    Symbol: BDX


    2.)    Company Name: Becton, Dickinson and Company

    3.)    Stock Price: $71.48

    4.)    Market Cap: $16.7 Billion

    5.)    Enterprise Value: $19.24 Billion

    6.)    EV/EBITDA: 8.5

    7.)    Book Value: $5.150 Billion

    8.)    Tangible Book Value: $3.5923 Billion

    9.)    TTM2010 Net Income:$1.272 Billion

    10.) 2009 Net Income: $1.231 Billion

    11.) 2008 Net Income: $ 1.127 Billion

    12.) TTM Free Cash Flow: $1,281

    13.) Debt/Equity: .29

    14.) Return on Equity: 25.56%

    15.) Return on Invested Capital: 11.2%

    16.) Shares Outstanding: 244 Million

    17.) 2012 Earnings Estimate: $6.46

    18.) Target Price Range: 15 times 2012 earnings or $96.9

    Investment Rationale: Becton Dickinson is a medical equipment manufacturer that has dominant market positions in the areas of needles and surgical tools. Almost every medical office has exposure to BDX through their syringes and scalpels. Due to the financial crisis BDX like all other medical equipment companies have seen decreases in spending from hospitals which have been impacted by the recession. Also due to the healthcare overhang and new taxes being implemented on medical equipment manufacturers the stock earnings multiple has been reduced. BDX continues to produce, grow, and most importantly generate cash. They boast an extremely well financed balance sheet with very reasonable debt loads. BDX has a current free cash flow yield of 7.6% and free cash flow should grow by about 10-12% over the next couple of years. This means that BDX is going to have the ability to buy back shares or make strategic tuck in acquisitions moving forward. With the aging of the baby boomer generation and the increasing spending on health care from the emerging economies there is likely to be an increasing demand for the products of BDX moving forward. We see BDX as a great opportunity to experience 10+% annual returns over the next couple of years with very limited risk even if we don’t see much of an economic recovery.

    Investment Strategy: Buy 100 shares at $71.32 at sell 1 December 2010 75 call for $2.35.

    Return if stock closes over $75: $603

    Maximum Risk: $6,897

    Target Net on max risk return: 8.74%

    Days Until Expiration: 182

    Target Annualized Return: 17.48%

    We believe there is very limited risk to BDX and by using the covered call strategy we are reducing that risk even further by generating the extra premium. Even if the stock stays below $75 during that time frame we will have lowered our cost basis and we will still see the potential benefits of its upside potential, while retaining the ability to continue writing new covered calls.

    Primary Risk Factors:

    If the new healthcare legislation has a worse affect then what we are anticipating for BDX you could see some weakness. Also because they generate so much cash and have a great balance sheet an overpriced education would be a negative risk as well. 

    Disclosure: Long BDX
    Stocks: BDX
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