Becton, Dickinson and Company, a medical technology company, develops, manufactures, and sells medical devices, instrument systems, and reagents worldwide. The companys BD Medical segment produces medical devices that are used in various healthcare settings. This segments products include needles, syringes, and intravenous catheters for medication delivery; prefilled IV flush syringes; syringes, pen needles, and other drugs to treat diabetes; prefillable drug delivery systems; anesthesia needles and trays; sharps disposal containers; and closed-system transfer devices. Its BD Diagnostics segment provides products for the safe collection and transport of diagnostics specimens, as well as instrument systems and reagents to detect various infectious diseases, healthcare-associated infections, and cancers. This segments products consist of integrated systems for specimen collection; safety-engineered blood collection products and systems; automated blood culturing systems; molecular testing systems; microorganism identification and drug susceptibility systems; liquid-based cytology systems for cervical cancer screening; rapid diagnostic assays; and plated media. The companys BD Biosciences segment produces research and clinical tools that facilitate the study of cells and their components. This segments products comprise fluorescence-activated cell sorters and analyzers; monoclonal antibodies and kits for performing cell analysis; reagent systems for life science research; cell imaging systems; laboratory products for tissue culture and fluid handling; diagnostic assays; and cell culture media supplements for biopharmaceutical manufacturing. It markets its products through independent distribution channels and independent sales representatives to healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry, and the general public.
Analysts expect BDX to grow earnings 6.12% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter, slightly above the long term inflation rate. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $92.60. This means that at $76.59 the shares are undervalued by 17.3%.
Over the last 12 months, Becton Dickinson's EPS were $5.52 and it's current book value per share is $21.22. The Graham Number is calculated to be $51.34 which means it is currently overvalued by 49.2%.
Average High Dividend Yield:
Becton Dickinson's average high dividend yield for the past 5 years is 2.16% and for the past 10 years is 1.89%. This gives target prices of $83.36 and $95.29 respectively based on the current annual dividend of $1.80. These are undervalued by 8.1% and 19.6%, respectively. I think the 5 year average high yield is going to be more typical of the yield you will see going forward, although I actually think the average high yield will be creeping even higher. So far in 2012 the high yield mark hit 2.75% with a low yield of 2.43%.
BDX's average low PE ratio for the past 5 years is 13.67 and for the past 10 years is 15.81. This corresponds to a price per share of $73.28 and $84.75 respectively based off the analyst estimate of $5.36 per share for the fiscal year ended at the end of September. The report will be released shortly. The 5 year and 10 year low PE price targets are overvalued by 4.5% and undervalued by 9.6%, respectively. BDX hasn't traded with as high of a difference in PE ratios, but lately has been trading in a lower range of 12-20 since 2008.
Average Low P/S Ratio:
Becton Dickinson's average low PS ratio for the past 5 years is 2.16 and for the past 10 years is 2.13. This corresponds to a price per share of $77.28 and $76.44 respectively based off the analyst estimate for revenue growth from FY 2011 to FY 2012. The 5 year and 10 year low PS price targets are fairly valued.
Dividend Discount Model:
For the DDM I assumed that BDX will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 13.70%. After that I assumed they can continue to raise dividends for the next 5 years at 75% of 15%, or 10.27%, and by 3.50% in perpetuity. The dividend growth rates are based off fiscal year increases and don't necessarily correspond to quarter over quarter increases. To calculate the value I used a discount rate of 10%. Based on this, Becton Dickinson's is worth $51.88 meaning it's overvalued by 47.6%.
Becton Dickinson's trailing PE is 13.88 and it's forward PE is 13.21. The PE3 based on the average earnings for the last 3 years is 14.26. I like to see the PE3 be less than 15 which BDX passes at it's current price. Compared to it's industry, BDX seems to be undervalued versus ABT (15.91) and BAX (15.90). Against the industry as a whole, Becton Dickinson is undervalued with the industry carrying a PE ratio of 18.45. All industry comparisons are on a TTM EPS basis.
BDX's gross margin for FY 2010 and FY 2011 was 58.8% and 58.7% respectively. They have averaged a 57.7% gross profit margin since 2001 with a low of 55.9% in FY 2002. Their net income margin for the same years were 17.9% and 16.2% respectively. Since 2001 their net income margin has averaged 13.9% with a low of 9.5%. I typically like to see gross margins greater than 60% and at least higher than 40% with net income margins being 10% and at least 7%. BDX just barely misses the gross margin target and well exceeds the net profit margin target. Since every industry is different and allows for different margins it's useful to compare Becton Dickinson's margin to it's competitors. BDX captured 101% of the gross margin for the industry and 122.7% of the net profit margin. While it's disappointing that BDX doesn't capture more gross margin than the industry when you're sitting at just under 60% gross margin's it's hard to improve on that number. The most promising part is that they capture an extra 22.7% net profit margin than the industry. This is very good to see because it means that BDX is able to turn more pennies from every dollar of sales into profit. Their cash-to-debt ratio for the same years were 0.81 and 0.47. This is the only real blemish from a fundamentals perspective.
Becton Dickinson's shares outstanding has decreased every year since 2001. They have decreased on average 1.86% of the shares outstanding since FY 2001 ended. This is another way that management can essentially return cash to shareholders and it's great that they are siding with their investors.
A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.
Becton Dickinson is a dividend champion with 40 consecutive years of dividend increases. Their current annual dividend sits at $1.80 for a current yield of 2.35%. BDX's annual increase for the last 1, 3, 5 and 10 years have been 18.29%, 13.70%, 14.63% and 17.40%. These numbers are different from the actual quarterly increases since these are based off the dividends paid out during each fiscal year. The most recent dividend increase started with the 4th quarter payout of 2011 and was a 9.76% increase. If they keep with their established increase timeline then we can expect another increase starting with the 4th quarter 2012 payout in December. Their payout ratio has increased slightly since 2001 but has averaged a very low 26.54%. The highest payout based off earnings was 33.90% in FY 2004.
Their FCF per share has been awesome since 2001 with no negative fiscal years. The payout ratio based off FCF has averaged 74.08% over that time however. I would like to see the FCF payout ratio come down since in FY 2011 dividends accounted for 136.67% of the FCF.
Return on Equity and Return on Capital Invested:
Becton Dickinson's ROE has averaged 21.71% since 2001 with a low of 19.10% and a high of 26.20%. Their ROCI is at a nice level as well averaging 16.40% since 2001 with a low of 13.40% and a high of 19.2%. For both ROE and ROCI I don't necessarily look for any absolute values rather I like to see stable or increasing levels. BDX has been able to increase their ROE and ROCI over the long term and if they can continue to increase or settle in at current levels they will be set up will in the long term.
Revenue and Net Income:
Since the basis of dividend growth is revenue and net income growth, we'll now look at how Becton Dickinson's has done on that front. Their revenue growth since 2001 has been a respectable 7.63% per year but their net income has been growing at an 11.23% rate since 2001. It's a great sign when net income grows faster than revenue since it means that management is getting operations much more efficient. This has allowed their net income margin to increase from 11.68% in 2001 to 16.21% in FY 2011. Revenue has grown every year over the time frame but is expected to decline this year before growing 3.20% for FY 2013.
Tangible Book Value:
Becton Dickinson has done a nice job increasing their tangible book value per share since 2001 with only one year of decline being FY 2011. They've managed to increase the TBV per share by an annual rate of 9.00% between FY 2001 and FY 2012. With the upcoming FY 2012 annual report due out soon, I would like to see the TBV per share increase. The tangible book value per share is a measure of the per share value of all tangible assets owned by the company.
The chart shows the historical prices since 2001 and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 5 years, 10 years or 16 whichever is least. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. In this case the target low PE is 15.81 and the 0.75 PE is 10.25. This corresponds to a entry price of $97.57 and $54.96 based off the expected earnings for FY 2012 of $5.36. This means that Becton Dickinson is trading at a $20.98 discount and $21.63 premium to the target prices, respectively. I don't think you'll see BDX trading for a 10 PE ratio although the average PE ratio has been declining since 2001. Currently BDX is trading at a discount to it's average PE ratios.
The average of all the valuation models gives a fair value $73.54 which means that Becton Dickinson is currently trading at a 4.15% premium to the average fair value. I've also calculated the fair value with the highest and lowest valuation methods thrown out. In this case, the DCF and Graham Number valuations are thrown out and the new average is $74.32. BDX is trading at a 3.06% discount to this price.
Overall I would say that Becton Dickinson is a hold if you already own it and a wait with a possible buy depending on how the shares react after the earnings announcement. The 2.50% yield price target is $72.00 which would get you in at a 2.09% discount to my calculated fair value. The starting YOC is a little low for what I like to target but BDX's management has shown they side with shareholders in returning cash via dividends and buybacks. With an upcoming dividend increase and earnings announcement you could get a nice boost to your YOC right off the bat.
What do you think about Becton Dickinson as a DG investment at today's prices?