Becton Dickinson - Stock Analysis

I last reviewed Becton Dickinson in this February 5, 2021 post at which time Q1 2021 results and increased adjusted diluted EPS guidance had just been released. Fast forward to August 5, 2021, and BDX has released Q3 and YTD2021 results and increased FY2021 guidance.

Following the release of these results, BDX's share price has fallen from $254.74 to the current ~$241 at the time I compose this post on August 6. I now take this opportunity to briefly analyze BDX to determine whether investors should consider the purchase shares.

Becton Dickinson - Stock Analysis - Business Overview

A good overview of BDX and its 3 worldwide business segments is found in Part 1 Item 1 in the FY2020 10-K.

A comprehensive list of all BDX's offerings is accessible through the Offerings portal found at the top of this web page.

BD Alaris Pump Remediation

In a February 4, 2020, voluntary recall action, BDX notified customers of specific areas where its Alaris Pump Infusion Module may not operate as expected.

In my February 16, 2020 post, I indicate this has led to a Class 1 recall by the FDA; a Class I recall is the most serious type of recall in that use of the Alaris Pump Infusion Module may cause serious injuries or death.

BDX has been working hard to remediate the issues with the most widely used infusion pump in acute care hospitals across the United States. In April 2021, it submitted a 510(k) premarket notification to the U.S. Food and Drug Administration (FDA) for the BD Alaris™ System. The purpose of the 510(k) submission is to:

  • bring the regulatory clearance for the BD Alaris System up to date;
  • implement updated features; and
  • address open recall issues, including through a new version of BD Alaris System software that will provide clinical, operational and cybersecurity updates.

In late July, BDX announced that working with the FDA, it is now initiating remediation of existing Alaris system devices in the field. A new software version is intended to remediate the issues identified in the February 4th, 2020 recall notice, and will provide programming, operational, and cybersecurity updates. This software update, however, still requires FDA review and clearance and BDX is not definitively predicting the FDA clearance in its FY2022 outlook given the inherent difficulty in predicting FDA clearance timelines.

BDX 2025 Strategy - Grow, Simplify, and Empower

The company continues to strengthen its market leadership positions in its durable core business and to invest in innovations that help accelerate and shape irreversible trends that are transforming global health. In this regard, BDX has been purposely shifting more of its R&D and tuck-in M&A investments into these spaces which are growing over 6%. The aim is to lift the weighted average market growth rate and performance over time.

In FY2021, BDX has launched several innovative products and solutions. In addition, a strategic portfolio review completed in July confirms BDX's pipeline is very deep and wide across its businesses. This pipeline has also been enhanced by acquisitions over the past 18 months.

While details will be provided at the November 12th Investor Day, BDX's Chairman/CEO/President shared the following on the Q3 analyst call.

  • In the BD Life Sciences business, shipment of the new BD MAX and BD Veritor combination flu COVID assays will begin in August. The BD Veritor combination test can detect and distinguish between COVID, flu A, and flu B in a single rapid test with a digital readout.
  • In the Biosciences business, BDX launched its new eCommerce site, bdbiosciences.com. This is an entirely new and innovative digital marketplace designed to provide a best-in-class online purchasing experience for flow cytometry customers.
  • There have also been several recent new product introductions. Furthermore, BDX has a healthy innovation pipeline of modular, scalable new instruments, and next-generation dies that will allow customers to fully leverage BDX's complete and integrated solution suite of instruments, reagents, informatics, single-cell multi-omics, and scientific support services.

BDX continues to focus on tuck-in M&A as a means of adding innovative products and solutions that leverage its core market leadership position. In FY2021, it has completed 7 tuck-in acquisitions with Velano Vascular, Tepha Inc., and ZebraSci being the 3 most recent transactions.

  1. Velano Vascular has an innovative needle-free technology that enables high-quality blood draws from existing peripheral IV catheter lines. This eliminates the need for multiple needle sticks.
  2. Tepha is a leading manufacturer of a proprietary resorbable biopolymer technology. This acquisition's benefits provide BDX with a vertical integration strategy for its current Phasix platform. More importantly, it provides BDX with new opportunities to expand into new high-growth areas of tissue repair, reconstruction, and regeneration.
  3. ZebraSci is a pharmaceutical services company. This acquisition provides BDX with the opportunity to expand its Pharmaceutical Systems business beyond injectable device design and manufacturing to include best-in-class testing for drug-device combination products.

Diabetes Care Spin-Off

In May 2021, BDX announced its intent to spin off its Diabetes Care business as an independent, publicly traded company. Details of the planned spin-off, which is expected to be completed in the first half of the 2022 calendar year, can be found here.

Progress is being made with the recent announcement of 2 directors from BDX's board who will be appointed as future directors of the Diabetes NewCo. Their appointments will be effective upon the completion of the spin-off at which point they will transition from the BDX board to the board of the Diabetes NewCo.

BDX is also progressing with the SEC Form 10-12B, which will have the carve-out financials. More comprehensive details about the spin-off should be publicly available around the end of 2021.

CFO Announces Intent to Retire

While Lockheed Martin's recent announcement of its CFO's decision to retire for personal reasons and accompanying negative news has raised 'red flags', I am not alarmed by BDX's EVP/CFO/CAO (Christopher Reidy) decision to retire as he reaches retirement eligibility. In the case of BDX, there will be an orderly transition.

In addition, Mr. Reidy will become a director of Diabetes NewCo. His appointment to the board will be effective upon the completion of the spinoff.

Tender Offers for Outstanding Debt Securities

On August 5, 2021, BDX announced that it has commenced tender offers to purchase for cash the debt securities issued by the Company listed in this Press Release.

Looking at the schedule of long-term debt in historical 10-Ks, we see that this debt was used to finance the Carefusion and CR Bard acquisitions. The interest rate environment at the time these debt instruments were issued is different from the current environment. In addition, the issuance of this debt resulted in BDX's domestic unsecured credit ratings being downgraded to non-investment grade.

BDX has subsequently restored its credit ratings to investment grade and can now borrow on more favourable terms.

Becton Dickinson - Stock Analysis - Financials

Q3 and YTD2021 Financial Results

On August 5, 2021, BDX released Q3 and YTD results. The accompanying earnings presentation is accessible here.

FY2021 Guidance

When BDX released Q1 2021 results it raised its FY2021 adjusted diluted EPS guidance to $12.75 - $12.85 from the prior $12.40 - $12.60 guidance.

BDX has now revised FY2021 adjusted diluted EPS guidance from $12.75 - $12.85 to $12.85 - $12.95. This higher guidance reflects the positive base business momentum and a lower tax rate.

Management's guidance continues to assume no major widespread hospital restrictions on elective procedures related to the COVID pandemic. However, there has been some impact on elective procedures from the COVID Delta variant in the last couple of weeks in certain U.S. states and guidance reflects some continuation of this.

It now expects its base business to grow ~7.5% - 8% on an FX-neutral basis. This is higher than the previous expectation of mid-single-digit growth.

It also continues to expect COVID diagnostic testing revenues of $1.8B - $1.9B with more revenue coming from international markets than previously anticipated.

Becton Dickinson - Stock Analysis - Credit Ratings

Following the Carefusion and CR Bard acquisitions in 2015 and 2017, BDX's priority has been in restoring investment-grade credit ratings; this was achieved in early FY2021.

BDX's 2025 strategy includes a focus on driving cash flow and strengthening the balance sheet. BDX's net leverage ratio was 3.0 as of FY2020 (September 30), 2.5 times as of December 31, 2020, and 2.4 times as of June 30, 2021.

The following domestic senior unsecured debt ratings remain unchanged from the time of my last review.

  • Baa3 (Moody’s) which is the lowest tier within the lower medium grade category;
  • BBB (S&P) which is the middle tier of 3 tiers within the lower medium grade category;
  • BBB- (Fitch) which is the lowest tier within the lower medium grade category.

All 3 ratings are investment grade and define BDX as having ADEQUATE capacity to meet its financial commitments. Adverse economic conditions or changing circumstances, however, are more likely to lead to a weakened capacity for BDX to meet its financial commitments.

These ratings are satisfactory for my purposes.

Becton Dickinson - Stock Analysis - Dividends and Share Repurchases

Dividend and Dividend Yield

BDX’s dividend and stock split history can be found here.

The 4th quarterly $0.83/share dividend is payable on September 30, 2021. With shares currently trading at ~$241, the dividend yield is ~1.4%.

In my February 5, 2021 post, I indicate that with the improvement in BDX's debt and liquidity positions, I envision dividend increases returning to the $0.05 - $0.06/share/quarter range as opposed to the $0.02/share/quarter witnessed in recent years. Given the impending spin-off of BDX's Diabetes Care business, I am uncertain $0.05 - $0.06/share/quarter range dividend increases may occur.

Share Repurchases

The weighted average number of outstanding shares in FY2011 - 2020 (in millions rounded) is 226, 209, 199, 198, 208, 218, 224, 265, 275, and 282. For the 9 months ending June 30, 2021, this is ~293.

In Q3, BDX repurchased $1B in stock at an average price of ~$242 using a portion of its $3.7B YTD cash flow from operations. Even with this repurchase activity, BDX ended Q3 with ~$3.2B in cash.

This marks the first share repurchase since 2017 and is also the largest share repurchase since 2012.

Becton Dickinson - Stock Analysis - Valuation

I think capital appreciation will comprise the majority of any potential return from a BDX investment. It thus becomes extremely important to purchase shares at an attractive valuation.

When I wrote my February 5, 2021 post, adjusted diluted EPS guidance had been raised to $12.75 - $12.85 and FY2021 adjusted diluted EPS guidance from 18 brokers was a mean of $12.77 and a low/high range of $12.40 - $13.01.

BDX was trading at ~$254.70 thus giving us a forward adjusted diluted PE of ~20 using the mid-point of management's guidance and ~19.6 if we used the high end of analyst guidance.

Using the $12.90 mid-point of management's $12.85 - $12.95 guidance and the current ~$241 share price, the forward adjusted diluted PE is ~18.7.

Following the recent increase in management's guidance, we have the following FY2021 - FY2023 guidance from the brokers which cover BDX:

  • FY2021 - 19 brokers - mean of $12.87 and low/high of $12.80 - $13.00. Using the current share price and the mean, the forward adjusted diluted PE is ~18.7.
  • FY2022 - 19 brokers - mean of $12.64 and low/high of $12.00 - $13.60. Using the current share price and the mean, the forward adjusted diluted PE is ~19.1.
  • FY2023 - 13 brokers - mean of $13.83 and low/high of $13.40 - $14.71. Using the current share price and the mean, the forward adjusted diluted PE is ~17.4.

I am hesitant to rely on FY2022 and FY2023 earnings estimates since the details of BDX's Diabetes Care business spin-off are unknown. Having said this, BDX's current valuation is reasonable. In addition, I think the proposed spin-off will result in BDX becoming a more focused business thus leading to superior investor returns.

Becton Dickinson - Stock Analysis - Final Thoughts

I started acquiring BDX shares in one of our retirement accounts in February 2009 and have added to my position over the years. I also initiated a position in November 2019 in one of the 'Side' accounts within the FFJ Portfolio. In fact, BDX was my 5th largest position at the time of my FFJ Portfolio Holdings Review in April 2021.

As recently as mid-April, BDX was trading at ~$261. We now have shares trading at ~$241 even though it posted strong Q3 and YTD results and increased guidance.

We currently do not have clarity on the impact of the spin-off of BDX's Diabetes Care business. I have no reason to think, however, that this divestiture is will not ultimately benefit BDX shareholders.

I view BDX's valuation as fair and am acquiring additional shares within the retirement account that currently has BDX exposure.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long BDX.

Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.