Navigating Challenges To Harness Growth, A Future Of Rising Revenue And Robust Margins In Medical Devices

Key Takeaways

• Accelerated revenue growth and market share improvement due to demand for consumables and Alaris systems, alongside strategic focuses like the BD 2025 strategy.
  
• Strong emphasis on driving margin expansion and substantial free cash flow growth, supporting further investment and boosting earnings.
  
• Key risks for Becton Dickinson include COVID-19 disruptions, competition, regulatory hurdles, dependency on key products, and execution of the BD 2025 strategy.

Catalysts

Develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products for healthcare institutions, physicians, life science researchers, clinical laboratories, pharmaceutical industry, and the general public worldwide.

• Accelerated revenue growth due to increasing demand for consumables and Alaris systems, indicating potential for continued revenue growth.
  
• Expansion and execution of the BD 2025 strategy, including innovation pipeline advancement particularly in connected medication management, likely to increase revenue and market footprint.
  
• Record production and shipping of Alaris pumps along with the planned second half contribution to growth from Alaris suggest improvement in revenue and market share.
  
• Efforts in the simplification strategy and execution of BD Excellence operating system aimed at driving margin expansion, likely to improve net margins.
  
• Strong focus on generating substantial free cash flow, with expectations for double-digit growth, enabling further investment and capital allocation strategies which support earnings growth.

Assumptions

• Analysts are assuming Becton Dickinson's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $9.37) by about September 2027, up from $1.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.1 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.6x on those 2027 earnings, down from 46.1x today. This future PE is lower than the current PE for the US Medical Equipment industry at 37.0x.
• Analysts expect the number of shares outstanding to decline by 0.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Risks

• The potential risks associated with COVID-19 or other pandemic outbreaks could disrupt production or supply chains, impacting revenue and earnings negatively.
  
• Heightened competition in the medical devices and life sciences sectors could pressure margins and affect market share, impacting earnings negatively.
  
• Regulatory challenges, particularly with upcoming 510(k) submissions for the Alaris system and other products, could delay product launches or lead to increased compliance costs, affecting net margins.
  
• Dependency on the success of key product lines like Alaris for revenue growth could pose a risk if expected market demand does not materialize or if there are unforeseen product issues, impacting revenue negatively.
  
• Execution risks associated with the BD 2025 strategy, including innovation pipeline delivery and margin expansion efforts, could affect the company’s ability to meet its financial targets, impacting earnings and net margins.

Valuation

• The analysts have a consensus price target of $277.5 for Becton Dickinson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $325.0, and the most bearish reporting a price target of just $240.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $23.1 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 34.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of $232.67, the analyst's price target of $277.5 is 16.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.