Rating Update: Stock Rating C-Neutral (2/6/20)-Becton Dickinson and Co (BDX).

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BUSINESS

Becton, Dickinson and Company develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products worldwide. It operates in two segments, BD Medical and BD Life Sciences. The BD Medical segment offers syringes, pen needles, and other products for diabetes; needles, syringes, and intravenous catheters for medication delivery; prefilled IV flush syringes; regional anesthesia needles and trays; sharps disposal containers; closed-system transfer devices; skin antiseptic products; surgical and laparoscopic instrumentations; intravenous medication safety and infusion therapy delivery, and automated medication dispensing and supply management systems; medication inventory optimization and tracking systems; and prefillable drug delivery systems.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to exceed the cost of capital, BDX is expected to continue to be a major Value Builder.

Becton Dickinson and has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Becton Dickinson and has a slightly negative Appreciation Score of 35 but a slightly positive Power Rating of 66, and the Neutral Value Trend Rating results.

Becton Dickinson and’s stock is selling above targeted value. The current stock price of $252.25 compares to targeted value 12 months forward of $238.
This moderately low appreciation potential results in an appreciation score of 35 (65% of the universe has greater appreciation potential.)
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Becton Dickinson and has a Power Rating of 66. (This slightly positive Power Rating indicates that BDX’s chances of achieving favorable investment performance over the near to intermediate term are only average.)
Contributing to this slightly positive Power Rating: recent price action has been favorable. Offsetting factors are earnings estimate behavior for BDX has been slightly negative recently; and is in a slightly weakened position current.

INVESTMENT PROFILE

BDX’s financial strength is above average. Financial strength rating is 63.
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Relative to the S&P 500 Composite, Becton Dickinson and Co has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that BDX is higher risk. All factors are relative weaknesses. Relative weaknesses for BDX include: low financial strength, low historical growth, and high earnings variability. BDX’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. BDX has unusually high market capitalization.

CURRENT SIGNALS

Becton Dickinson and’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

Becton Dickinson and’s current technical position is very strong. The stock price is in a 13.3 month up move. The stock has appreciated 29.9% from its prior low. The stock price is above its 200 day moving average which is in an uptrend. The stock has just fallen below its 200 day moving average.

ALERTS

Becton Dickinson and Co (NYSE: BDX) has recently experienced extremely important negative changes in investment behavior: the stock’s recent price decline challenged its longer term uptrend, and the stock fell on very heavy volume.
Minimal negative changes in fundamentals have recently occurred for Becton Dickinson and Co (NYSE: BDX): significant quarterly earnings deceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
For its first fiscal quarter (ending December 31), Becton Dickinson and Co (NYSE: BDX) has reported a -58% decline in E.P.S. from $2.09 a year ago to $0.88 in the current quarter. This performance was $-1.77 short of the consensus estimate of $2.65. For the latest four quarters through December 31, E.P.S. were $2.80 versus $3.34 for the same period a year ago — a decline of -16%.
Becton Dickinson and Co (NYSE: BDX) stock suffered a major decline of -11.8% on 2/6/20. The shares closed at $252.25. Moreover, exceptionally high trading volume at 727% of normal accompanied the decline. The stock has been strong relative to the market over the last nine months but has declined -10.6% during the last week.

CASH FLOW

In 2019, Becton Dickinson and experienced a very significant reduction in cash of -$633 million (-51%). Sources of cash were much lower than uses. Cash generated from 2019 EBITDA totalled +$5,024 million. Non-operating uses consumed -$1,035 million (-21% of EBITDA). Cash taxes consumed -$419 million (-8% of EBITDA). Re-investment in the business amounted to -$269 million (-5% of EBITDA). On a net basis, debt investors received -$2,788 million (-55% of EBITDA) while equity investors removed -$1,146 million (-23% of EBITDA).
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BDX’s Non-operating Income, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Becton Dickinson And Co Peer Group. In most years, Becton Dickinson and was in the lower quartile and second quartile. Currently, Becton Dickinson and is lower quartile at -21% of EBITDA (-$1,035 million).

BDX’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Becton Dickinson And Co Peer Group. In most years, Becton Dickinson and was in the lower quartile and top quartile. Currently, Becton Dickinson and is at median at -8% of EBITDA (-$419 million).

BDX’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Becton Dickinson And Co Peer Group. In most years, Becton Dickinson and was in the top quartile. Currently, Becton Dickinson and is upper quartile at -5% of EBITDA (-$269 million).

BDX’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Becton Dickinson And Co Peer Group. (Since 2017 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Becton Dickinson and was in the second quartile and top quartile. Currently, Becton Dickinson and is lower quartile at -55% of EBITDA (-$2,788 million).

BDX’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Becton Dickinson And Co Peer Group. In most years, Becton Dickinson and was in the top quartile and lower quartile. Currently, Becton Dickinson and is slightly below median at -23% of EBITDA (-$1,146 million).

BDX’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Becton Dickinson And Co Peer Group. In most years, Becton Dickinson and was in the top quartile and lower quartile. Currently, Becton Dickinson and is lower quartile at -13% of EBITDA (-$633 million).
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BDX’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Becton Dickinson And Co Peer Group. (Since 2017 Cash, %Revenue has experienced a very sharp decline.) In most years, Becton Dickinson and was in the top quartile and third quartile. Currently, Becton Dickinson and is lower quartile at +4%.

PROFITABILITY

Becton Dickinson’s return on equity has eroded very significantly since 2010 although it experienced a very sharp recovery after the 2018 low.
This very significant erosion was due to very strong negative trend in pretax operating return offset by very strong positive trend in non-operating factors.
The productivity of Becton Dickinson’s assets declined over the full period 2010-2019: asset turnover has suffered a very strong overall downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that decelerated very sharply from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Becton Dickinson’s return on equity is substantially below median (5.8%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is substantially below median (2.3%) reflecting asset turnover that is below median (0.33X) and lower quartile pretax margin (6.8%).
Tax “keep” rate (income tax management) is upper quartile (104.8%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is at median (2.46X).

GROWTH RATES

There are no significant differences between Becton Dickinson’s longer term growth and growth in recent years.
Becton Dickinson’s historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 7.3% per year.

Total asset growth has been 19.3% per year.

Annual E.P.S. growth has been -3.3% per year.

Equity growth has been 15.1% per year.

Becton Dickinson’s consensus growth rate forecast (average of Wall Street analysts) is 11.2% — in line with the average of the historical growth measures.
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Relative to the Becton Dickinson And Co Peer Group, Becton Dickinson and’s historical growth measures are generally top quartile. Revenue growth (7.3%) has been upper quartile. Total asset growth (19.3%) has been upper quartile. Equity growth (15.1%) has been upper quartile. E.P.S. growth (-3.3%) has been substantially below median.

Consistent with this pattern, consensus growth forecast (11.2%) is also at the upper quartile.
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PRICE HISTORY

Over the full time period, Becton Dickinson’s stock price performance has been highly stable and in line with the market. Between April, 2009 and February, 2020, Becton Dickinson’s stock price rose +317%; relative to the market, this was a +9% gain. Significant price move during the period: 1) April, 2009 – January, 2020: +355%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 11.7% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2020 of 11.7% is below median relative to Becton Dickinson and Co Peer Group.

Current 5-year total return performance of 16.5% is above median relative to the S&P 500 Composite.
Through January, 2020, with above median current 5-year total return of 16.5% relative to S&P 500 Composite, Becton Dickinson and’s total return performance is slightly above median relative to Becton Dickinson and Co Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, BDX’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/revenue is above median. Ratio of enterprise value/assets is slightly above median. The lowest factor, the price/equity ratio, is slightly below median.

Relative to Becton Dickinson and Co Peer Group, BDX’s overall valuation is normal. The highest factor, the price/earnings ratio, is above median. Ratio of enterprise value/earnings before interest and taxes is above median. Ratio of enterprise value/assets is at median. Ratio of enterprise value/revenue is at median. The lowest factor, the price/equity ratio, is at median.
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Becton Dickinson and has a major value gap compared to median valuation. For BDX to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 5.03X to 2.45X. If BDX’s ratio of enterprise value/revenue were to decline to 2.45X, its stock price would be lower by $-165 to $87.
For BDX to achieve upper quartile valuation relative to the Becton Dickinson and Co Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 5.03X to 8.33X. If BDX’s ratio of enterprise value/revenue were to rise to 8.33X, its stock price would increase by $211 from the current level of $252.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to exceed the cost of capital, BDX is expected to continue to be a major Value Builder.
Becton Dickinson’s current Price Target of $243 is little changed from the current price of $252.25.
This moderately low appreciation potential results in an appreciation score of 35 (65% of the universe has greater appreciation potential.)
With this moderately low Appreciation Score of 35, the moderately high Power Rating of 66 results in an Value Trend Rating of C.
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Becton Dickinson’s current Price Target is $243 (+10% from the 2019 Target of $220 but -4% from the 02/06/20 price of $252.25). This slight rise in the Target is the result of a +1% increase in the equity base and a +9% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a large positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
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PTR’s return on equity forecast is 19.7% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2011 and 2019. The current forecast is well below the 2011 peak of 25%.

PTR’s growth forecast is 6.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2011 and 2019. The current forecast is below the 2011 peak of 9%.

PTR’s cost of equity forecast is 9.5% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2011 and 2019. The current forecast is steady at the 2011 low of 10.4%.
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At Becton Dickinson’s current price of $252.25, investors are placing a positive value of $138 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 16.7% versus a cost of equity of 10.5%.
PTR’s 2021 Price Target of $243 is based on these forecasts and reflects an estimated value of existing assets of $147 and a value of future investments of $95.

About John Lafferty 69239 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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