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Stocks to Buy on Dips: BDX

November 04, 2011 | About:
Chandan Dubey

Chandan Dubey

97 followers
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.
Today, I am going to pitch medical device maker Becton-Dickinson (BDX).

The company

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.

Sales analysis

The sales of BD has grown at a compounded rate of 7.38% in the last decade.

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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.

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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%.

Balance sheet

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.

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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.

Shareholder return

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.

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Valuation

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.

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Management

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.

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Guru holding

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.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.8/5 (18 votes)

Comments

mountaincloud
Mountaincloud - 2 years ago
I own BDX, and thanks for the research.

But where did you get the price for Greenlight?

My calculation for Greenlgith's price is around $71, not 86 as you pointed out.

BDX only went north of 86 in May~July of 2011, during which Greenlight didn't add any.

He acquired 77% of his position in 2010, and I guess the price didn't go over even 80 most of the time.

You don't want to mislead people in any way even if unintentionally.......

I will add when it comes down a lot.....BDX is on FPA's shopping list, but they say, it never come close enough for them to take a position. So, you know......

cdubey
Cdubey premium member - 2 years ago
Hi,

I did not want to mislead (it was quite un-intentional :). Gurufocus' David Einhorn's page says that he holds 2,331,598 shares with value $200,913,000. This comes to $86/share. I guess, I am reading the holding wrong.

Thanks for pointing it out. Your information will help people do their own research.

-Ch
ry.zamora
Ry.zamora - 2 years ago
*applause*

It's substantial for something quick, easy, and crude.

...now I have some questions.

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.


1. What is its market share in the medical division? Who are the primary competitors? Who are its most prominent customers? I'm interested in how large its control over the industry has been and how stable, not to mention how much BD is recognized as a leader in its field.

2. As BD is in the business of making and selling devices and instruments, does it put money through R&D processes? If so, I'd want to know if they have any patents or, preferably, just how much was spent on it. The answer may reveal another barrier to entry versus other players.

3. Love the scale economy. If I may ask, would you happen to know how much of its inventory it sells in a given year, on average?

4. Sales in terms of geography: is there any particular region that generates a significant amount of its yearly revenues?

5. Why did ROIC/ROE take a slight dip in 2004? Also, how do you define ROIC in this particular analysis?

6. Why did FCF fall on '06 and '07? Is this decrease mostly tied to its profits, to its working capital, or to CAPEX?

Anyway, in all likelihood, it looks cheap to me and worth adding to my shopping cart of stocks to buy.

BTW Cdubey, off-topic: what software are you using to make your charts? The aesthetic appeal is quite strong and I'd like to use that for the extensive reports I put up here on occasion.
cdubey
Cdubey premium member - 2 years ago
@Ry.zamora: Thanks for the questions. It will help me dig deeper before taking a position. I will answer your questions in detail sometime during the next week. Have a deadline this week. Meanwhile, I will answer the off-topic questions as they require less digging into.

The simple charts (chart 2, 3, 5 and chart 6) are done with google docs spreadsheet. Online tool, a life saver for me as I can work from home or office on the same file without having to worry about different versions, as long as I have the internet.

The first and fourth charts are a bit tricky. I was trying to find a way to plot two charts on the same graph. Could not find anything to do so (side-remark: does anyone know how to do this except excel ?). I am using Numbers now (a Mac OS X software). It gives you more control over the charts and also lets you stack one chart on top of another. After that you need to play with transparency/opaqueness and use cheap tricks to make it look like what you want.

-Ch

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