Tickers in this Article: BDX, ABT, RHHBY, CPHD, HOLX
It's pretty rare to see an “Underperform” rating on a med-tech stock these days, but Becton Dickinson (NYSE:BDX) carries more than Johnson & Johnson (NYSE:JNJ), Abbott (NYSE:ABT), and Cepheid (Nasdaq:CPHD) combined. I won't pretend to have read all the research reports out there, but it seems that most of those analysts who are cautious/negative on BD are so because of the stock's very robust valuation and concerns about both near-term and long-term growth in the diagnostics business. I too see these shares as overpriced relative to the likely growth trajectory, and wouldn't be a buyer at these levels.

A Sound Fiscal Q3 Doesn't Help The Bears
Against that bearish backdrop, BD continues to perform pretty well. Overall reported revenue growth of under 4% met expectations, with underlying organic constant currency growth of about 5%. Growth in the medical space (up 8%) was well ahead of the underlying market, while diagnostics (up 4%) was more or less in line, and biosciences (down 3%) was weak.

SEE: A Checklist For Successful Medical Technology Investment

Although BD's reported profits and margins weren't very good in absolute terms, they did well where it counts (relative to sell-side/Wall Street expectations). Gross margin fell about a half-point from last year, as forex moves and acquisition expenses offset pricing benefits. Operating income declined 5% and the operating margin fell almost two points, though the company did come in a point better than expected on restrained opex spending.

Strong Medical Leading The Way
Although patient volumes and procedure counts are far from robust, BD's Medical business continues to deliver appealing growth well ahead of the underlying markets. Diabetes in particular is notably strong (up 9%), as although the company benefited from the reversal of some adverse timing issues, demand for smaller needles and pre-filled pens continues to be quite strong in the face of weak diabetes results from companies like Johnson & Johnson.

Menu Matters
BD's diagnostics business performance is more mixed. Relative to Abbott (up more than 7%), Roche (Nasdaq:RHHBY) (up about 5% ex-diabetes), and Danaher (NYSE:DHR) (up “mid single digits”), BD isn't exactly blowing the doors off their hinges. The company is seeing good results in its process of transitioning customers to its new MAX platform, with about 40% of the placements actually displacing rivals. Long-term, the good assay cost and flexibility of the MAX ought to serve the company well, but sales growth will likely be limited until BD can role out a more robust menu of tests (space is limited in labs, and adding a new box doesn't make sense if it can't run enough tests).

Longer-term, though, BD may have more work to do. Although the company has pretty good share in molecular testing, I do have some concerns about whether they will lose share in STD testing to Hologic (Nasdaq:HOLX) and Roche over time, as well as Cepheid (Nasdaq:CPHD) in hospital-acquired infections (HAI). Likewise, I don't see the company as particularly well-placed for the upcoming growth spurt in hepatitis C testing (including both viral load testing and genotyping), and rivals like Abbott, Roche, and Cepheid may have BD on the outside of a market that could deliver double-digit growth for much of the next decade.

SEE: Cepheid Posts Prelim 2Q13 Results

BD being BD, I wouldn't expect any dramatic moves. While I think BD could consider acquiring a diagnostics company like Cepheid or GenMark (Nasdaq:GMRK), neither would come cheaply. Still, it would help lift reported growth and sometimes the Street gets what it wants in that regard.

The Bottom Line
It's hard for me to see how BD is cheap today. While I believe there is still above-average growth potential in the diabetes business and under-appreciated potential in the company's new injectables business, the shares seem priced for growth that I just don't believe the company can deliver. Seeing as I don't think the stock will pull back to $90 or so any time soon without something going very wrong in the market, I don't see Becton Dickinson shares holding all that much appeal.

Disclosure – At the time of writing, the author owned shares of Roche.

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