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A Value Guy Looks At Becton Dickinson & Co., BDX (June, 2017)

|Includes: Becton, Dickinson and Company (BDX)

A valuation estimate of BDX with 4 assumed growth rates listed below, performed on: 6/13/2017 by Bud Labitan at frips.com

Then, after this primary stock valuation estimate, I present an estimated valuation that includes the C.R.Bard acquisition. Disclaimer: Data presented below come from various company and online publicly available resources. I welcome your comments and discussion about this interesting business.

Is BDX an intelligent investment or intelligent speculation today?

1. Understand the economics of this business? Becton, Dickinson and Company (BD) is a global medical technology company engaged in the development, manufacture and sale of a range of medical supplies, devices, laboratory equipment and diagnostic products. The Company operates through two segments: BD Medical and BD Life Sciences.

The BD Medical segment produces an array of medical technologies and devices that are used to help improve healthcare delivery in a range of settings. BD Medical consists of various business units, including diabetes care, medication and procedural solutions, medication management solutions and pharmaceutical systems.

The BD Life Sciences segment provides products for the safe collection and transport of diagnostics specimens, and instruments and reagent systems to detect a range of infectious diseases, healthcare-associated infections and cancers. The Company's BD Life Sciences segment consists of various business units, including preanalytical systems, diagnostic systems and biosciences.

On October 5, 2014, BDX and CareFusion (NYSE: CFN) announced a definitive agreement under which BD would acquire CareFusion for $58.00 per share in cash and stock, or a total of $12.2 billion, to create a global leader in medication management and patient safety solutions.

In comparison of BDX's current market cap of 43.26 Billion, This 12.2 billion acquisition of CareFusion reflects about 28% of BDX's current market capitalization.

2. Sustainable Competitive Advantages? BDX is a respected brand name in the healthcare industry. Its historical profit margin record averaged at 14% net profit margin from 2009 to 2014, and is viewable here:

financials.morningstar.com/ratios/r.html...

This brings into question as to why the net profit margin has decreased to an average of 9% in the last 3 years? In the 2016 10-K, Costs relating to acquisitions and other restructurings represented transaction, integration and restructuring costs substantially associated with the CareFusion acquisition and portfolio rationalization. The transaction and integration costs specifically included advisory, legal, and other costs substantially incurred in connection with the CareFusion acquisition. Restructuring costs in 2016 included a $214 million charge recorded to impair capitalized internal-use software assets.

The combination of the two companies' complementary product portfolios will offer integrated medication management solutions and smart devices, from drug preparation in the pharmacy, to dispensing on the hospital floor, administration to the patient, and subsequent monitoring. The combination will improve quality of patient care and reduce healthcare costs by addressing unmet needs in hospitals, hospital pharmacies and alternate sites of care to increase efficiencies, reduce medication administration errors and improve patient and healthcare worker safety. In addition, the Company will have solid positions in patient safety to maximize outcomes in infection prevention, respiratory care, and acute care procedural effectiveness. CareFusion will operate as part of BD's Medical segment, and BD is committed to maintaining an active presence in San Diego where CareFusion is headquartered.

Competitors are listed here: www.google.com/finance/related?q=NYSE%3A...#

3. Able and Trustworthy Managers? Current Net Profit Margin = 10.6 Current Debt/Equity ratio = 1.29

The latest 10K is presented here: www.sec.gov/Archives/edgar/data/10795/00...

Total Long-Term Debt for 2016 = $10,55 billion and for 2015 = $11.37 billion.

Notice that the interest expense coverage ratio is showing signs of imrovement in 2016 and the trailing twelve months.

financials.morningstar.com/ratios/r.html...

4. Is there a Margin of Safety from a bargain price? Here are 4 estimates based on forward growth at 6%, 8%, and 10%

Starting with an estimate of annual Free Cash Flow of approximately $1,841,000,000 dollars and the number of shares outstanding at 226,080,000 shares; I used an assumed FCF annual growth of 6 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $113.66.

Market Price = $192.36 Intrinsic Value = $113.66 (estimated)

A valuation estimate of BDX with an assumed growth rate of 8 percent. Starting with an estimate of annual Free Cash Flow of approximately $1,841,000,000 dollars and the number of shares outstanding at 226,080,000 shares; I used an assumed FCF annual growth of 8 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $129.3.

Market Price = $192.36 Intrinsic Value = $129.3 (estimated)

A valuation estimate of BDX with an assumed growth rate of 10 percent. Starting with an estimate of annual Free Cash Flow of approximately $1,841,000,000 dollars and the number of shares outstanding at 226,080,000 shares; I used an assumed FCF annual growth of 10 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $147.23.

Market Price = $192.36 Intrinsic Value = $147.23 (estimated)

A valuation estimate of BDX with an assumed growth rate of 12 percent. Starting with an estimate of annual Free Cash Flow of approximately $1,841,000,000 dollars and the number of shares outstanding at 226,080,000 shares; I used an assumed FCF annual growth of 12 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $167.78.

THE KEY QUESTIONS FOR THE LONGER TERM INVESTOR: MOAT-BUILDING? GROWTH IN "EARNING POWER" POST ACQUISITION?

The current P/E of 31.86 may be deceptive. Is the acquisition of Carefusion an exercise in Moat-building that will increase the business Earning Power? And, if so, this can impact the estimates of future intrinsic value per share that are presented conservatively here today.

If we study the P/V ratio based on a 10% growth assumption, $192/$147 = 1.3 P/V

ESTIMATED VALUATION THAT INCLUDES THE C.R.BARD ACQUISITION

Stated below is my current view of the deeper BDX valuation that attempts to estimate a reasonable "intrinsic value per share" for the new reformed entity of BDX and its BCR acquisition.

Your comments and views are welcome.

My model relies on a valuation estimate of BDX + BCR (combining the FCF of both) using an assumed growth rate of 12 percent on the combined ttm cash flows, performed on: 6/14/2017 by Bud Labitan at frips.com

Recent income growth rates for both businesses can be viewed here:

(Click on the Growth tab in the linked pages below.)

financials.morningstar.com/ratios/r.html...

and

financials.morningstar.com/ratios/r.html...

Assumptions used: (Note that.my assumtions for future growth are slightly higher than the stated 10-year Averages for Revenue% and Net Income%) This assumes:

1. a mild upswing in healthcare profitability after the American healthcare system stabilizes. AND

2. The combined entity BDX manages to secure worldwide healthcare market growth. AND

3. Some measure of cost savings by combining both businesses.

Thus, I reluctantly use an optimistic 12% growth rate in my model outlined below.

BDX FCF = 1,847m

BCR FCF = 517m

sum = 2,364m = $2.36 billion

Starting with an estimate of annual Free Cash Flow of approximately $2,364,000,000 dollars and the number of shares outstanding at 262,280,000 shares; I used an assumed FCF annual growth of 12 percent for the first 10 years and assume zero growth from years 11 to 15. The estimated intrinsic value per share (discounted back to the present) is approximately $185.7.

Market Price = $192.36 Intrinsic Value = $185.7 (estimated) ... a 4% difference

*Note that a businesses with brand advantages can be modelled with a longer tail or more cash flow in the "excess return period years" also known as the "terminal growth period years."

With this in mind, the 4% difference, and brand advantages, I find it reasonable to say that, in my current view, I am inclined to believe that BDX's current market price of around $192 is a reasonable value; and thus neither a bargain, and, not an excessive asking price per share.

Your comments and views are welcome.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BDX over the next 72 hours.

Additional disclosure: You may contact me at www.frips.com