“America has the best doctors, the best nurses, the best hospitals, the best medical technology, the best medical breakthrough medicines in the world. There is absolutely no reason we should not have in this country the best healthcare in the world.” – Bill Frist
Medical technologies company Becton, Dickinson and Company (BDX) is operating in a market that’s poised to grow exponentially. It’s got the best dividend disbursal record and the lowest PE ratio among its peers, and yet its price has dropped from $270 in late April 2020 to $237 as of June 10, 2020.
I am extremely bullish on the healthcare sector in the long term, and had posted about my view in The Lead-Lag Report and tweeted about it in May 2020. In my opinion, the action in this sector will further heat up after the pandemic is controlled.
Image Source: Twitter
Though BDX is operating in a growing market, I am neutral on it because of its prior price performance, the COVID-19 disruption, and the value of goodwill and intangibles in its books. Here’s my analysis:
1. The pandemic disruption has been so severe that people have started postponing elective and non-essential medical procedures. Organizations and the government are busy diverting resources towards managing the pandemic.
BDX has already witnessed a significant decrease in demand for its products and the company estimates Q2 2020 to be negatively impacted. It also estimates weakened demand as long as the disruption continues. Sales of products that enjoy high margins have been impacted.
2. BDX faces significant competition not just from its peers but also from distributors of medical devices. What’s happening is that traditional distributors have set up medical device manufacturing facilities, and the company’s peers are consolidating and growing larger in scale. The competition is at fever-pitch, and if there’s any further consolidation in the industry, it will pressurize demand and prices.
3. BDX’s product sales to researchers at biotechnology companies also will take a hit because such R&D departments are dependent on grants from the U.S. National Institutes of Health (“NIH”) and agencies in other countries. The company anticipates funding will dry up, but cannot estimate when and for how long.
Goodwill and Intangible Assets
Image Source: Seeking Alpha
As of March 31, 2020, BDX’s total assets were $53.51 billion. Of that, about $38 billion was represented by goodwill and intangible assets. The intangibles have been adding up year over year and there has been almost no impairment to date.
In its SEC filing in September 2019, the company disclosed that it had a model for determining impairments, and as of that date no impairment was required (p. 38).
Given that the company says its business is facing competition from distributors, and that its peers are consolidating, I feel a case exists for the company to start impairing its intangibles within a reasonable period.
Image Source: Seeking Alpha
The company has the highest dividend distribution among the group, and it is in a business that is about to take off. Its forward PEG (Non-GAAP) is 2.46, which is the lowest in the group, and this confirms what analysts estimate – that the company will enter a high-growth phase. BDX’s forward PE Non-GAAP too is 22.65 – the lowest in the group.
Given these data, the stock should have appreciated almost at the same pace as its peers. The fact that it hasn’t is an indication that market players do not fancy it much at these prices.
1. On May 21, 2020, BDX priced its recently announced offering of $1.5B of common stock at $240. The company plans to use the funds to repay debt, finance working capital, invest in acquisitions, and for general corporate purposes.
The key sentiment driver is the offer price – $240/share – which kind of kills any potential near-term upside. And there wasn’t one, to begin with.
2. On May 27, 2020, The Shareholders Foundation reminded BDX shareholders that a lawsuit was pending against the company. The original lawsuit was filed on Feb. 27, 2020, and it alleged that the company’s Alaris infusion pumps had experienced software errors and alarm prioritization issues. However, the lawsuit alleges BDX was investing in fixing the product and not upgrading the software. So, the company may face regulatory or recalls. The allegation goes on to add that because of these events, the company’s positive statements about its operations and prospects were false or misleading.
BDX is a quality company operating in a highly competitive market that has been disrupted by COVID-19. Many analysts are bullish on the stock, but I choose to be neutral on it because of the following reasons:
1. The goodwill and intangible assets make up 71% of the company’s total assets, and it has yet to start an impairing program despite operating in a very competitive market.
2. Until the COVID-19 disruption lasts, the company’s sales of high-margin products will get impacted.
3. BDX has priced its new offering at $240, which will dampen sentiment in the short term.
4. The company’s peers have outperformed it from both the long- and short-term points of view.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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