It stands to reason that in an industry still struggling with weak end-user demand, the companies that are executing well are not especially cheap. That could apply to Intuitive Surgical (Nasdaq:ISRG) or St. Jude (NYSE:STJ), and it certainly seems to be true of Becton Dickinson (or BD) (NYSE:BDX). This remains a fine company, one of the best in health care, but that quality is already largely in the stock price. (To learn more about this sector, check out Investing In The Health Care Sector.)

TUTORIAL: Earnings Quality

An On-Target Second Quarter
BD didn't shock anybody with its second quarter earnings, but "good enough" is definitely good enough these days in health care. Overall reported revenue rose 10% from last year's level, while currency-adjusted revenue was up more on the order of 5%.

Oddly enough, the company's growth was well-balanced across its units. The Medical segment was up 4.9% on good pharma system and diabetes care sales. Diagnostics was up a similar 4.8% on good preanalytical and diagnostic systems sales, and Bioscience grew 4.3% as the company balanced weaker government funding (which largely pays for systems and consumables in academic labs) with good performance in the cell analysis business.

Profitability was pretty good as well. Gross margin rose a full point on better productivity, a more profitable mix of product sales, and some FX benefits that offset higher input costs (like resin). BD lost some of this momentum through higher SG&A expenses, but nevertheless saw better than 11% operating income growth and a modest improvement in operating margin.

Overseas Helping, Especially in the East
Relative to rivals like Johnson & Johnson (NYSE:JNJ) and Bard (NYSE:BCR), BD gets quite a bit of its sales from overseas, and emerging markets in particular. With emerging market revenue growing 13% this quarter (and making up about one-fifth of sales), this exposure is allowing BD to grow at a time when weak markets in the U.S. and Western Europe (to say nothing of government-mandated price pressures in some areas) are crimping growth.

It is something of a mystery to me how companies like BD, Baxter (NYSE:BAX), and Covidien (NYSE:COV), companies not generally credited with being on the forefront of "gee whiz" medical technology, have beaten so many of their large-cap med-tech peers to the punch when it comes to international expansion. Maybe that is just par for the course - companies that don't have dynamic revenue growth drivers usually have to really focus hard on execution to thrive - but it is interesting all the same

A Solid Future
Outside of molecular diagnostics, BD has a reputation for not being in a host of exciting businesses. Frankly, strong returns of capital and good cash flow should be all the excitement investors need. Even still, there is more going on here than people often realize.

While new guidance is leading to longer intervals between pap tests for women, BD can still see growth through share gains (from Hologic (Nasdaq:HOLX) for instance) as new technology like the SurePath comes to market, and through international expansion. Likewise, the BD MAX should give the company firm footing to compete with the likes of Abbott (NYSE:ABT), Danaher (NYSE:DHR), and Qiagen (Nasdaq:QGEN), and upcoming assays for MRSA and Clostridium difficile (c.dif) will set up an interesting battle with Cepheid (Nasdaq:CPHD) in the hospital infection monitoring market.

The Bottom Line
Admittedly, BD is not as underpriced as many names in med-tech these days. On the other hand, investors are getting a company with solid execution, a good overseas business, and a healthy pipeline to drive future growth. If growth and risk can be thought of as a fraction, with growth being the numerator and risk being the denominator, it is fair to say that BD doesn't score so high on growth. Considering the lower risk profile, though, investors may find that while the overall capital gains potential here is not as high as with other names, the surety of the value looks better. (For more on the importance of earnings on a stock, read Earnings Power Drives Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  9. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center