About a year ago, I concluded that Becton, Dickinson and Company (NYSE:BDX) was advancing in health, not necessarily the investment performance. I came to this conclusion after I recognized that shares have been underperforming since the $24 billion deal for C.R. Bard back in 2017.
While leverage has come down, alongside earnings multiples, it was a lackluster operating performance which prevented me from getting too upbeat, leaving me to take a neutral position at best.
A Recap
When Becton, Dickinson announced a $24 billion deal in 2017 for C.R. Bard, the company was willing to award a $5 billion premium to the business, as the deal was set to boost margins and increase earnings per share, all aided by the availability of cheap debt.
The deal gave Becton a greater foothold in medication management, infection prevention, with more synergies seen by offering a wider range of products, including vascular access drug delivery products. The deal did not come cheap at 6.5 times sales of $3.7 billion, with EBITDA coming in around a billion.
Ahead of the deal, Becton was a $12.5 billion business, which posted adjusted earnings near $2 billion, equal to $9 per share. The deal meant that net debt would jump to $22 billion, for a 4.5 times leverage ratio, even after factoring in some shares issued in connection with the deal. This left me cautious, with shares trading at $180 at the time.
In the years since 2017, shares of Becton have traded in a relatively tight $200-$280 range, trading at $250 in the summer of 2022. Looking at the 2021 results, Becton has advanced to a $20.2 billion revenue base on which GAAP operating earnings of $2.8 billion, and net earnings of $2.0 billion, were reported. Adjusted earnings topped $13 per share, with GAAP earnings coming in at half that number, mostly due to amortization charges related to the deal with Bard.
In the meantime, net debt has come down to $15.2 billion with EBITDA trending around $5 billion, as the company actually found itself in a solid financial room to announce some share buybacks as well. The issue is that 2022 financial results would come in largely flattish, after such a performance was seen in the first half of the fiscal year, mostly due to the fact that the company recorded $2 billion in pandemic-related revenues in 2021, a number set to be coming down as the pandemic was on its retreat.
With shares trading at 20 times adjusted earnings, while the earnings were not showing much growth, and leverage came in around 3 times, I did not see screaming appeal. This was not altered as Becton announced a $1.5 billion deal for Parata Systems, an innovative provider of pharmacy automation solutions, a deal adding a mere $200 million in revenues.
What Happened? Trading Stagnant
Since the summer of last year, shares of Becton Dickinson have traded in a relative tight $220-$260 range, currently exchanging hands at $258 per share, marking zero gains over the past year.
In November of last year, Becton announced a four cent increase in the quarterly dividend to $0.91 per share, with dividends paid out at a rate of $3.64 per share. Later that month, the company posted a 1.4% fall in full year sales to $18.9 billion due to the retreat of Covid-19 related revenues and a strong dollar, as the comparable revenue base in 2021 has been lowered following the spinoff of Diabetes Care business Embecta.
Following the spinoff, adjusted earnings fell to $11.35 per share, even as they were up seven cents compared to the 2021 numbers, all while net debt was flattish around $15 billion.
The company guided for flattish sales in 2023, with sales seen at a midpoint of $18.7 billion, although the assumption is based on mid-single digit organic growth, offset by the impact of a stronger dollar, with earnings seen up modestly to $11.85-$12.10 per share.
In May, the company posted second quarter results as the company now sees sales at $19.2-$19.3 billion, due to inflationary trends and some dollar weakness, with adjusted earnings seen at a midpoint of $12.21 per share, all while net debt ticked up a bit to $16 billion. With 285 million shares outstanding the company still commands a formidable $73 billion market value, or about $89 billion if we factor in net debt.
A Small Divestment
In June, the company announced another small divestment, in an effort to keep repositioning the portfolio. The company has reached a $540 million deal with Steris plc (STE) to sell its Surgical Instrumentation platform. The divestment includes some 3 manufacturing sites and involves some 360 workers. Becton will see some $170 million in revenues leave the door, fetching a 3.2 times sales multiple, which is a bit dilutive to the overall valuation of Becton shares, which trade at nearly 4.5 times sales, although the margin profile of these activities has not been shared.
Needless to say the deal is relatively small, with less than a percent of revenues leaving the door, but the lower multiple is telling, as all of this will not move the business case at all. In fact, earnings power comes in a bit lower than seen last summer, and with earnings power trending at $12 per share (adjusted) and leverage not really coming down, I can only reiterate a neutral stance for Becton, Dickinson and Company shares at the very best here.
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