If you have been priming your portfolio for a significant buying opportunity, this series of articles are targeted at you. In the series, I am going to look at companies with the following characteristics:
- Companies built to last. This means wide moat, pricing power, and durable competitive advantage. We will not deal with a lot of technical hocus-pocus and will not consider most technology stocks because of the ever-changing playing field.
- Companies with strong FCF and good history of FCF growth in the last decade, preferably with market cap which is less that 12*FCF. Why 12*FCF? Assuming a 1% growth in FCF forever, with a 10.2% discount rate, gives us the magic number 12*FCF as the terminal value of the stock. What this means is that the market is pricing the company for a less than half of the U.S. economic growth rate (which is around 2%, if seen over a period of larger than 30 years) and a 10% discount rate.
- Companies with good ROE with little or no debt, or companies with good ROIC. We will try to look at companies which have manageable levels of debt. We will err on the side of safety.
- Companies with good management practices and good history of shareholder returns. This will look at the share counts, buybacks, dividend along with the management compensation, options and stock awards. Good insider holding/guru holding will be a plus.
- Companies with very good balance sheet. We don’t want the company to face any major headwinds because of credit crunch in the next year. In particular we would like the company to be well financed with a good current ratio.
BD is an manufactures and sells medical devices, instrument systems and reagents. It was founded in 1897 and has business in nearly 50 countries.
BS has three main divisions. Through its Medical division BD is world's largest producer and distributor of products such as needles and syringes. The diagnostic division deals with safely collecting and analyzing various specimens to detect disease. The Bioscience division sells research and clinical tools used in study of cells.
The sales of BD has grown at a compounded rate of 7.38% in the last decade.
Furthermore, the profitability of BD has been pretty stable and solid. The gross, operating and net margin have all improved steadily in the last decade.
As we see, the sales growth in the last year has been positive across the segments and geographically areas. International growth has been more than 9% and in the U.S. it has been around 2.2%.
BD has a very good balance sheet. If we look at the history of the way BD has been funded, we see that the balance sheet has gradually improved in the last decade.
LT debt has decreased and is now $1.5 billion. The cash position has improved to $1.7 billion and the stockholder equity has gradually improved too.
The quick ratio stands at 1.76 and hence BD is very comfortable in funding itself. There is also not risk of credit crunch at the moment.
BD has been phenomenal for its shareholders in the last decade. BD's stock was selling for $32/share in December 2001 and now it sells for $73 a share. BD has never cut dividends, and it has increased dividend every year since 2001 (at least). In dividends it has returned $9.83 (not inflation adjusted) and the share gain has been $41/share. This is a $50.83 return on $32 investment, which is 10% compounded return.
In 2001, it was selling for P/E=19.1, P/B=3.7, P/CF=12.4 and P/S=2.3. You could have bought it at $32/share.
Now BD is selling for $72.38 at P/E=13.3, P/B=3, P/CF=9.7 and P/S=2.2. It is cheap on all ratios compared to 2001.
Furthermore, it passes our screen with flying colors. The FCF stands at $1.2 billion and the growth has been quite stable. So, 12*FCF=14.4 billion. The current market cap is $15.57 billion.
The CEO, Mr. Vincent Forlenza, joined BD in 1980 and has been CEO since March 2003. The returns have been fantastic. Let's look at ROE and ROIC.
Donal Yacktman holds 0.75%, David Einhorn holdes 1.07% and Chris Davis holds 3.24% of the outstanding shares. David Einhorn's 4.29% portfolio is invested in BD at and average price of $86. The 52-week low for the stock is $69.59, and currently it trades around $73.
Why the low price?
The low price of the stocks, seems to stem from the fact that the fourth quarter earning fell by 24% because of absence of a prior-year contribution due to discontinued operations. BD has also said that it plans to purchase $1.5 billion of its stock during the fiscal year.
Disclosure: I do not own any shares. But I will probably buy it soon enough. And add more if the prices fall.