Becton, Dickinson and Co.: A Fair Value Report

This report is about Becton, Dickinson and Co. (NYSE:BDX) and covers the company’s fiscal year ended Sept. 30, 2020. Listed earnings and metrics utilizing earnings are for that specific 12-month time period unless otherwise noted. Unaudited or reviewed financial information is not apart of, nor included in, this report.

What they do
Becton, Dickinson and Co., commonly known as BD, is a medical technology company engaged in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by health care institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. Industry peers include Abbott Laboratories (NYSE:ABT) and Stryker Corp. (NYSE:SYK).

Short-term target
My current short-term target for the stock is $260.01 with an initial trailing stop set at $246.47. Based on a recent price of $250.22, upward price movement will find resistance at $257.21 and again at $272.68, with final resistance found at $282.82. Downward price movement will find support at $243.63 and again at $237.51, with final support found at $233.71.

One-year growth price target
My one-year growth price target is actually a price target range, determined by adding year-over-year earnings growth to the prior-year annual dividend yield and dividing the result by the current annual price-earnings ratio.

For this stock, my current one-year growth price target range is $248 to $299.

Volatility adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market.

Based on my current beta ratio for this stock of 0.78, my volatility adjustment to recent pricing is $71 per share, making my current volatility adjusted price $321.

Quality of earnings
A company’s earnings can be impacted by a variety of sources unrelated to the company’s current day-to-day operations. Discontinued operations, tax refunds, depreciation and impairment, for example, may distort a company’s operating income and, consequently, its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts.

Of the company’s $3.61 in fiscal 2020 per-share earnings, 10 cents came from some combination of other sources, income taxes, interest, minority interests or discontinued operations.

Key performance indicator rating
I use key performance indicators as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Based on a 0 to 105 scale, my KPI for this company is 39.

Annual shareholder return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company’s fiscal year from the stock price at the start of business on the first day of the company’s fiscal year, plus any dividends paid during that period, and then divide the result by the opening stock price on the first day of a company’s fiscal year.

For fiscal 2020, the company spent $0.00 per share buying back company stock, paid a common stock dividend of $3.54 per share and had year-over-year annual price appreciation of $(22.60), which created a year-over-year annual shareholder return of (8)%.

Over the prior five-year period, the company spent an average of 19 cents per share buying back company stock, paid an average annual common stock dividend of $3 per share and had average annual price appreciation of $26.74, which created an average annual shareholder return of 19%.

Cost of common equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the 30-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium.

My cost of common equity for this stock is 3.98%.

Acquisitions expenditures
During fiscal 2020, the company spent $164 million acquiring businesses, a 100% year-over-year increase. Over the past five years, the company has spent $23.869 billion acquiring businesses.

The year-over-year numbers
There are many year-over-year numbers for investors to focus on. But to me, there are only a handful that have any significant meaning, and so those are the numbers that I highlight in this space. Please remember these are year-over-year numbers.

For fiscal 2020, revenue decreased 1%, earnings decreased 35%, free cash flow decreased 21% and debt increased by 8%. Additionally, the company’s annual operating rate, which I calculate by adding operating expenses to the cost of goods sold and dividing the result by net sales, was 92.

Current price ratios
Investing requires effort. Value investing requires patience. Stock prices require consideration. As a way to screen a company to determine if it is worth my effort, patience and consideration, I use several price comparison ratios.

For this company, my price-earnings ratio is 69, my price-book ratio is 3, my price-tangible book value is (5), my price-to-debt ratio is 4, my price-free cash flow ratio is 36 and my return on invested capital is 12%.

Risk-reward ratio
I determine my risk-reward ratio by subtracting my current terminate target from a recent price and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 5 or greater. My risk-reward ratio for this stock is -27.

Prior five-year averages
My average valuation for the prior five-year fiscal period was $52. The stock price during that time period averaged $202, earnings averaged $5.09 per share and the average price-earnings ratio was 40.

Fair value investing
It is important to remember that the current market price of an equity is the price negotiated between a willing buyer and a willing seller. This market price is not the fair value of the associated company, but the negotiated price of a single equity trade.

The basic investing tenet for a fair value investor is price determines return. As such, it is important to have some understanding of the value of the company as an ongoing concern and to develop a strategy that, with current value in mind, will allow investment in that company at some reasonable discount to current pricing.

My most recent fair value estimate for the stock of this company as an ongoing concern is $46. This estimated fair value forms the basis for my target prices as shown on my worksheet.

Becton, Dickinson and Co.- fiscal year-end September 2020 – is overvalued. The stock is currently trading at levels above my most recent $74 terminate target. Please See Linked PDF Worksheet.

Thoughts for a rainy day
I came across this stock looking for companies that were supporting the Covid-19 vaccine. One of the things this company does is make syringes and my reading had led me to an article that noted the company had received orders for 1 billion-plus syringes. I was intrigued. I should not have been. It came down to a few simple things that highlight what I consider the hubris of management, something I wish I had seen before I devoted time exploring this stock.

What I wish I had noticed early in my research was from 2002 through 2020, the period I have valuations for, $25.7 billion was spent on business acquisitions, an activity that management has little feel for since the company ended 2020 with a goodwill balance of $23.6 billion, an intangibles balance of $13.8 billion and a tangible book value of $(74).

I also wish I had paid closer attention to the price-earnings ratio, or more specifically the change in the ratio. From fiscal 2002 through fiscal 2016, the price-earnings ratio averaged 22, but from 2017 through 2020 the ratio averaged 69. What I should have focused on was that from 2017 through 2020, the company spent $15.6 billion on acquisitions. Right or wrong, had I noticed this, I would have decided the company was getting little return on its investment in these acquired companies. A potential red flag I missed that could have saved me quite a bit of research time.

I will give management props for increasing the company’s dividend every year for the past 48 years, just as I will give the markets props for running the price of the stock up to what I consider unsustainable levels, both of which should make investors in this stock consider what it is they expect this stock to do for their portfolios going forward. In short, perhaps investors should consider exactly where the syringes the company is selling are going to be used.

My disclaimer
I am a long-term, buy and hold investor, practicing a value investing philosophy. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent Annual Report on Form 10-K.

Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Thanx for reading.


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About the author:

Scott Waxler

I run a baseline equity research firm (Wax Ink)that is not licensed or registered with any government agency.

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