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.)
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