Quick Value 4.5.21 ($BDX)

Becton Dickinson - potential quality healthcare conglomerate at 18.5x earnings

Market Performance

Market Stats

Worth noting the level of volatility is finally starting to fade (as measured by the VIX index)…

When I was learning the value investing ways from my mentor, I was taught to consider the VIX over 20 as above-average volatility, near 10 as extremely low, and anything over 30-40 as a “pretty good buying opportunity.”

You can see the 2009 peak and the 2020 COVID peak fairly clearly. It’s been somewhat of a surprise to see how long it took the VIX fall below long-run averages despite the strong upward movement in markets.

Takeaway from this? Watch for complacency and/or that slow, relentless grind higher in the markets…

In other stats, there were a handful of good releases over the past week…

Manufacturing PMI posted a big number and remains above long-term averages…

Consumer confidence index saw a big jump (likely thanks to stimulus checks going out).

Quick Value

Becton Dickinson and Co ($BDX)

Healthcare conglomerate with 3 divisions:

• Medical — injection-related products like syringes and needles, catheters, and IV systems

• Life Sciences — products for collecting and transporting blood and other specimens

• Interventional — surgical products and instruments

The stock has been stagnant for a few years but it looks to have the makings of a quality business at a pretty reasonable price.

2021 estimates calling for ~$13 in per share earnings and ~$5.7bn EBITDA. At a $242 stock price it’s a $70bn market cap and $85bn enterprise. Good for a 18.6x PE and 15x EV/EBITDA multiple.

The business was built on the back of 2 major acquisitions — CareFusion in 2014 for $12bn and CR Bard in 2017 for $24bn.

Financial performance has been spotty but COVID certainly had an impact with elective procedures plummeting in 2020 — revenue was down 1% in 2020 and EPS fell 13% from $11.68 to $10.20. And with no earnings growth from 2018-2020, investors might be questioning the overall approach.

With the acquisitions, BDX has been boxed into a corner in allocating cash exclusively to repay debt and fund the dividend

They did a large equity offering in 2020 to help clean up the balance sheet…

On the upshot…

• The 2021 outlook calls for good revenue growth and earnings of $12.75-12.85 per share

• Revenue grew ~25% in Q1 FY2021 so the rebound is starting to take shape

• Cash flow can now be directed toward other uses… Buybacks haven’t happened since 2014! After capex and the dividend, BDX should have $2-2.5bn left over for buybacks or M&A

• Management is targeting double-digit returns through earnings growth + dividend (~1.4% yield)

• Most of these business lines are #1 in their respective markets (terms of market share)

• Competitors like Abbot, Stryker, and Boston Scientific trade at ~25x forward earnings

All told, this has been a stagnant business but has the makings of a quality healthcare player at a reasonable valuation.