Tuesday, August 18, 2009

Buffett's Newest Stock Pick

Jae Jun is the author of Old School Value, a value investing blog focused on fundamental analysis, stock valuation and stock ideas that offer high returns with low risk.

With the release of Berkshire Hathaway's 13-F filing, you can see that a new addition has been made to the holdings of Berkshire Hathaway.

1.2million shares of Becton Dickinson & Co (BDX) were added which totals $86.6 mil but compared to his total portfolio and other holdings, it is a very small position. This initial position is half the size of when Berkshire first added Eaton Corp (ETN) which again leads me to think that it was a subsidiary making the purchase as Buffett is known to go big first time around.

I previously went over BDX briefly while going through the 40 Best Stocks to Retire on and noted that the company...

...has consistently produced plenty of FCF but FCF growth has been minimal, very good CROIC of 15%, steady growth in shareholders equity/book value, stable rising margins, debt to equity is consistently dropping, sales has been increasing. - Best Stocks for Retirement

Whoever made the purchase, BDX looks to be a typical Buffett type company. Long history or consistent performance with results to match.

Quick Look


[caption id="attachment_2136" align="alignnone" width="433" caption="BDX Spider Graph"]BDX Spider Graph[/caption]

Business Summary


Becton, Dickinson and Company (BDX) is a medical technology company that operates through three business segments: BD Medical, BD Diagnostics, and BD Biosciences.

  • BD Medical: offers syringes, needles, monitoring systems, drug delivery systems, blades, scalpels and thermometers



  • BD Diagnostics: microbiology products, specimen collection products, specimen management systems, diagnostic instruments and consulting services



  • BD Biosciences: flow cytometry systems for cell analysis, monoclonal antibodies for biomedical research, molecular biology products for the study of genes and their functions, cell growth and screening products and labware products


The company generates more than half of its revenues from international operations which will help to diversify income but swings in foreign currency can impact top line results. But remember, it's the bottom line that is most important.

Financial Statement Analysis


Running through the numbers I see the following:

  • Gross, operating and net margins have been steadily increasing even in a recessionary environment

  • A dividend aristocrat which has increased dividends for 36 years

  • FCF positive for more than 10 years

  • Inventory turnover consistent but since margins have increased, leads to higher efficiency and profit

  • ROA and ROE increasing steadily

  • Reduced debt

  • Very low capitalization ratio which shows how leveraged the company is with debt

  • Has plenty of FCF to pay down debt rather than issue stock or seek loans

  • CROIC is very steady at 17% which means that the company makes 17c off every $1 of cash invested

  • Converts 12c of every dollar in sales to FCF. BDX is a FCF machine.

  • Excellent management


DCF Intrinsic Value Estimate


The assumptions are as following for the DCF model:

  • With the level of consistency and outstanding numbers a 9% discount rate is used

  • 10% growth rate which is just a little under the FCF growth but looks to be the rate of growth the company has displayed according to the graph below. After all price follows value which means I can reverse engineer the DCF to find the growth rate.

  • 50% margin of safety but don't feel it has to be so big for BDX


With a couple of assumptions you can see from the graph below that BDX has been trading close to its intrinsic value until September 2008 when the markets crashed. It's probably the biggest drop and difference its had so far.

Intrinsic value comes out to $87.

[caption id="attachment_2139" align="alignnone" width="500" caption="BDX Price vs Value Graph"]BDX Price vs Value Graph[/caption]

(Click on the image to view the PDF version of the stock analysis and graphs.)

Benjamin Graham Formula Valuation


BDX top line growth is just as good as its bottom line. By looking at multiple years and comparing them in a staggered fashion and then looking at the mean to smooth out cycles and one time bad years still shows a historical EPS growth rate of 17%. My calculated 17% is actually fairly close with Yahoo or Reuters past 5 yr growth rate of 16%.

This is a little too high by my standards for future growth in a mature company which is why I lowered it down to 10%.

This gives a fair value of $111.

Competitor and Peer Analysis


Probably the simplest way to value a company.

If you look at the 7th page of the stock analysis report that I posted, you will see that BDX side by side with 5 competitors and the numbers show that BDX is slightly cheaper than its competitors.

BDX current PE of 13.86 is lower than peers with less revenue and lower metrics. Seems like 15 or 16 is what BDX would be trading at if priced correctly.

  • PE 15 = $72

  • PE 16 = $76


Summary


From the valuations we looked at, BDX looks to be worth somewhere between $72 - $111 but I believe the range would be more towards $76-$90.

Becton Dickinson looks to be a very typical Buffett type company selling at a discount to its intrinsic value.

This article was featured on Carnival of Personal Finance - History of College Football Edition

Relevant Articles:

- Berkshire Hathaway’s portfolio changes for 2Q 2009
- Best Big Companies for the Long Term
- Warren Buffett – The Ultimate Dividend Investor
- Why do I like Dividend Aristocrats?

5 comments:

  1. never too late to re-examine a good company on numbers & esp in times of loss aversion fears

    ReplyDelete
  2. I was actually a little surprised to see that Berkshire took a stake in BDX. In my opinion, there seem to be other companies within the medical equipment sector that seem more undervalued than Becton Dickinson and share similar wide moat characteristics--most notably, Stryker Corporation (SYK).

    Both have market caps of around $15B, ROEs that are consistently around 20%, similar free cash flow yields, and sticky/moaty businesses. However, SYK sports lower valuation multiples than BDX despite having a 10-year compounded annual growth rate that is more than twice as high as BDX.

    But, of course, Buffet might be seeing something in the management of BDX or in the business that I don't see.

    Lastly, thanks for the wonderful analysis of BDX!

    ReplyDelete
  3. Thanks madvictor9 and ATS.
    Sorry for the late response. I've been away for a week or so.

    ReplyDelete

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