Becton, Dickinson & Co. (BDX, Financial) delivered another strong top and bottom-line beat when it reported earnings results last week.
While the company continues to see benefits from Covid-19, it also produced growth excluding Covid-related products in almost all aspects of its business.
In addition, Becton, Dickinson & Co., along with the rest of the medical device industry, has aging trends that should allow for growth in the coming years. For example, data for 2020 shows that just over 9% of the global population was above the age of 65. However, it is expected that this age group will come to represent 16% of the world's population by 2050, a dramatic change in a relatively short period of time. The need for medical care and devices will only increase as a result.
As a leader in the medical device industry, Becton, Dickinson & Co. should be in a prime position to capture a significant amount of this market share.
In this article, we will look closer at the company's results, valuation and prospects to determine whether investors should consider adding it to their portfolios.
Earnings highlights
Becton, Dickinson & Co. reported earnings results for its second quarter of fiscal 2021 on May 6 (the company's fiscal year ends Sept. 30). Revenue grew 15.4% to $4.91 billion, $27 million higher than Wall Street analysts had anticipated. Adjusted earnings per share improved 64 cents, or 25.1%, to $3.19. This was 15 cents above estimates.
Covid-related revenues totaled $480 million. Excluding this, revenues were still higher by 4.2%.
On a currency neutral basis, Medical, the largest component of the company, grew 4.7% to $2.3 billion. Medical Delivery Solutions was up by a high single-digit percentage due to higher demand for acute care related to Covid-19. Growth for this business was also due to Covid-19 vaccine injections, but, overall, utilization still ranks lower compared to pre-pandemic levels. Pharmaceutical Systems was up almost 10% as demand increased for pre-fillable syringes.
On the other hand, Medication Management Solutions decreased 2% as fewer installations of dispensing products was only partially offset by gains in international markets. Diabetes Care, which is being spun off into a separate company, was down slightly from the prior year, mostly due to advanced purchases in Q1.
Life Science increased nearly 38% from the prior year to $1.6 billion. However, this was primarily due to Covid-19 related results. Removing this, revenue fell 2.4%. Integrated Diagnostic Solutions, which contained much of the Covid-19 related revenue, grew 46.2%, but fell 7.5% when backing out testing products. The company's rapid test system contributed $290 million to results. Covid-19 specimen collection and transport added $190 million. On the other hand, social distancing requirements led to a weaker flu season, which means routine diagnostic testing is still not at pre-pandemic levels.
Biosciences improved more than 12% as an increase in research lab work has led to robust demand for higher instruments and reagents. Vaccine research and development was a tailwind for this business.
Interventional was essentially flat from the prior year at $1 billion. Peripheral Intervention was slightly higher as strength in peripheral artery products outweighed headwinds from a resurgence of Covid-19 in the U.S. and Europe. Urology and Critical Care grew at a mid-single-digit clip as temperature and urology products continue to have better demand. Lower surgical procedures continue to be an issue as the Surgery business was down almost 8%. The company did note that business improved towards the end of the quarter.
All regions showed growth during the second quarter as well. The U.S., which accounted for just over half of total revenues, was higher by 1.9%, while international markets grew nearly 26%. Developed markets were up 10.4%, but the real growth was in emerging markets, where sales were up 24%. Right now, emerging markets and China make up only a small portion of total revenues, 14.5% and 6.9%, respectively, but there is the very real potential for exceptional gains to be made in these two categories. For example, China, which only recently became a major focus for the company, grew 62%. The purchase of Bard in 2017 was done in part due to that company's presence in the country. I believe that China will be especially important for the company in the coming years.
Becton, Dickinson & Co.'s balance sheet looks to be in good position. The company ended the quarter with $54.9 billion of total assets and $10 billion of current assets, including cash and equivalents of $3.8 billion. This compares to total liabilities of $30.1 billion and $5.4 billion of current liabilities. Total debt of $17.7 billion was down 16.3% year-over-year. The company has just $1 million of debt due within the next year.
The company distributed $264 million of dividends during the quarter while generating free cash flow of $935 million for a payout ratio of just 28%. Becton, Dickinson & Co., which has increased its dividend for 49 consecutive years, has an average free cash flow payout ratio of less than 41% over the past four years.
Becton, Dickinson & Co. reaffirmed guidance for fiscal year 2021. The company expects revenue growth of 12% to 14% and adjusted earnings per share in a range of $12.75 to $12.85. This would represent a nearly 26% improvement at the midpoint for adjusted earnings per share. For context, the company has an earnings per share compound annual growth rate of 6.1% over the last decade. Last year's result was severely impacted by Covid-19. Moving the 10-year time frame back to fiscal year 2019, earnings per share grew at a rate of 9% annually. The company's guidance implies impressive expected growth this year.
Valuation analysis
Using Monday's closing price of $247, Becton, Dickinson & Co. has a forward price-earnings ratio of 19.3. This lands in between the stock's five- and 10-year average valuations of 20.8 and 18.6, respectively.
The stock's GuruFocu Value chart shows the stock offers upside potential.
Becton, Dickinson & Co. has a GF Value of $262.95, resulting in a price-to-GF-Value ratio of 0.94. Reaching the GF Value would result in a 6.6% return. Add in the stock's yield, which is low but well covered, and total returns would be almost 8%, a solid return for one of the best names in a fast growing industry.
Final thoughts
Becton, Dickinson & Co.'s most recent quarter showed yet another double-digit improvement for both revenue and earnings per share. Covid-19 remains much more of a tailwind than a hindrance, but the company still would have showed gains without the testing-related revenue. The majority of businesses remain in growth mode as well. The company also has several factors working in its favor, such as an aging population and impressive gains in emerging markets and China, both of which contribute a small portion of total revenues today.
Shares of Becton, Dickinson & Co. are trading at the same price as the last time I looked at the company, but the stock's valuation is below both its five-year average price-earnings ratio as well as its intrinsic value. The yield might not be enticing, but the company's nearly five decades of dividend growth show that the company is serious about returning capital to shareholders.
Given excellent business results, valuation, dividend history and return potential, I continue to believe that Becton, Dickinson & Co. is a good investment for those looking for exposure to the medical device industry.
Author disclosure: the author has no position in any stock mentioned in this article.
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