Becton, Dickinson and Company

Moat: 3.5/5

Understandability: 4/5

Balance Sheet Health: 4/5

Becton, Dickinson and Company is a global medical technology company that develops, manufactures, and sells a wide range of medical devices, instrument systems, and reagents.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Becton Dickinson and Company (BDX) is a global medical technology company specializing in the development, manufacture, and sale of medical supplies, devices, laboratory equipment, and diagnostic products. Their products are used by healthcare institutions, life science researchers, clinical laboratories, and the general public.

Business Overview

BDX’s business is structured into three primary segments: Medical, Life Sciences, and Interventional.

Medical: This segment primarily provides injection and infusion devices, medication management systems, prefilled syringes, and hypodermic needles, among other products.
Life Sciences: This segment is focused on products used in the detection of infectious diseases, including blood culture systems, molecular testing, and laboratory instrumentation.
Interventional: This segment sells a variety of vascular access products and surgical instruments, and provides a range of products used in drug delivery systems.

From a geographical perspective, BDX is a global business and is divided into two segments, the U.S. and International. The company has a good degree of geographical diversity, with both U.S. and International markets being very important for it.

The U.S. market accounted for approximately 53% of total revenue in 2022, 51% in 2021 and 50% in 2020. The remaining revenues are generated internationally and can be further broken down into geographic segments. In 2022, the International revenues were generated from the following regions:
Americas: 11%
Europe: 21%
Asia Pacific: 15%
Other: 1%
By 2024, revenue in Brazil and India are expected to equal that of Europe, the middle East and Africa.

Industry Trends & Competitive Landscape

BDX operates within the medical technology sector, which is characterized by a mix of large and small companies, with varying degrees of specialization. Innovation in medical technologies and advancements in healthcare systems are both drivers and challenges of the industry.

The medical device industry is known for its high barriers to entry including regulatory hurdles, lengthy approval processes and high R&D and capital investments.
The industry is also driven by demand from an aging population, which needs greater access to medical technologies and devices.
The competitive landscape is highly competitive, with some competitors like Medtronic, Abbott, Johnson & Johnson, Roche and Danaher, operating on a global scale.
They also face competition with regional and local players which have more localized knowledge in a specific geography.
The industry has seen increasing adoption of digital technologies and data analytics.
The move toward more personalized medicine is forcing medical device companies to tailor their products or services to patients.

Moat Analysis: 3.5/5

We assess BDX as having a “solid” or “narrow” economic moat. This moat comes from a combination of strong brands, switching costs and scale.

Intangible Assets: BDX has built strong brand recognition for some of its major products and devices. This provides the company with a small amount of pricing power and enables it to maintain high levels of customer loyalty. They also have patents on many of their products which further prevent competitors from duplicating their products, but given the long history of patent litigation, that is not the moat’s primary driver.
Switching Costs: BDX serves different health systems. Switching costs also provide a moat for BDX. For example, if a hospital uses BDX’s injection systems, the hospital’s staff will be trained on those instruments, and their documentation, procedures, and systems may be tailored around those products. Switching to new vendors often involves retraining and restructuring protocols, making it expensive and disruptive to switch to another vendor.
Cost Advantages: BDX operates a large global manufacturing and distribution network, which enables it to reduce costs by scaling and by having geographic access to customers. These can help them offer more competitive prices than their competitors.

Risks to the Moat and Business Resilience

Patent Expiration: BDX’s reliance on patents is a double edge sword, because once some of their patents expire, there can be a risk that competition will quickly increase their pricing pressures.
Technological Disruption: The medical device industry has been experiencing rapid changes due to technological advances. Such developments could undermine BDX’s competitive advantage if the company does not keep up with the latest technologies.
Regulatory Hurdles: BDX operates in a highly regulated industry, and changes in regulations can significantly impact both its current and future prospects. Moreover, BDX’s operations must adhere to a host of global standards, regulations, and approvals from different government bodies such as the FDA in the United States.
Industry Consolidation: The medical device industry is consolidating rapidly, and with new mergers and acquisitions, comes the need to have larger scale and be more competitive to sustain profitability and revenue growth.
Cyber Security Risk: Cyber security issues with the company’s systems and products can cause a lot of damage to BDX as the company stores very sensitive customer information and any leak would be catastrophic for its reputation.
Litigation Risks: BDX has had to deal with lawsuits, and it is likely that they will have to continue dealing with similar litigation which might be a risk to their earnings and operations.

However, the company has been quite resilient through all of this. They have managed to expand their operations and revenues across the different segments over the years. The diversified operations should help them reduce risk and allow them to focus on areas that are more likely to grow.

Financial Analysis

BDX has performed well financially over the past couple of years, despite market turbulences and other externalities.

Revenue Growth: While the company has had some bumps in revenue growth in some of the years, BDX has on average been able to have sustainable growth, with its revenues increasing from $19 Billion in 2021 to $20 Billion in 2023. The last quarter they reported a robust 8.4% increase in revenue. BDX’s revenue growth is expected to be approximately 4% in 2024.
Profit Margins: BDX’s profit margins have been very stable and healthy. Their gross margins have been steady in the 70s% range, and their operating margin was at an all-time high of 18.7% in Q4’23. However, their Operating profits have only grown by 2.7% YoY in Q4’23.
Return on Invested Capital (ROIC): BDX has been earning strong ROICs consistently. In FY23, they have had an ROIC of 11.6%, down from 13.5% in FY22. In FY19 their ROIC was 13.5% as well, so despite recent fluctuation their long term performance shows a strong and consistent profitability.
Capital Expenditures: The company has had high capex over the years, which makes it very clear the level of investments being made for production capacity and R&D. They plan to invest $1.2 billion in capex this year.
Free Cash Flow: BDX has strong free cash flow and is able to generate over $3 billion in cash flow per year, a sign that it is financially healthy. However, its free cash flow conversion rate is around 50% meaning that the company’s revenues are higher but it is spending a lot to grow and maintain its position. This can be due to the capital intensive nature of the industry.
Debt Load: BDX’s total debt is quite large at about $14 billion, but they are usually able to generate cash flows to service it comfortably. They have a debt-to-equity ratio of 0.9 and a debt-to-assets ratio of 0.4, so that’s within a reasonable range.

As a result of all this, and despite ongoing macroeconomic risks, BDX continues to demonstrate robust and consistent profitability with a high ROIC and strong free cash flows. The company seems well-positioned to continue this positive performance in the future as well.

BDX management provided an updated outlook for the full fiscal year 2024 which seems promising as they expect revenue growth to be between 6.0-6.5% on an organic basis.

Understandability: 4/5

The business itself is relatively simple to understand since it has three core segments, all dealing with the production of medical devices, lab testing equipment and surgical equipment. However, a lot of the company’s financials are quite complex to analyze.

The company primarily sells medical devices and instruments to a variety of customers, mainly other companies, medical institutions and labs. They don’t sell any products to individual consumers, so the main business model is not that complicated to understand.
Their business is not easily understandable from a financial perspective and requires detailed financial analysis, because the company generates revenues from several different segments and has complex partnerships, acquisitions and divestures. They also have large international operations.

Balance Sheet Health: 4/5

BDX has a solid balance sheet with a few potential problems, which make us give it a 4-star rating, not a 5-star rating.

Cash & Equivalents: BDX has low levels of cash and cash equivalents at $1.9B, while their short-term debts were around $4.1B in FY23, so that’s concerning given that they will need liquid assets to pay down their debts.
Debt Load: As we mentioned previously, BDX has a pretty big debt pile. While its debt-to-equity and debt-to-assets ratios are within a reasonable range, their high debt levels may become an issue if the company’s operations perform poorly, or they encounter an external economic shock.
Shareholders Equity: Their shareholder equity levels are also somewhat low, as compared to their debt, and are also prone to fluctuations, which could hurt investors confidence.
Goodwill: BDX has high levels of goodwill and acquired intangibles, and if that turns out to be less valuable, than this might lead to huge write-downs and decrease in shareholder equity.

Overall, BDX’s balance sheet shows a company with consistent long-term performance, but they are carrying a higher level of debt. However, their cash flows seem robust and that they can take on and deal with this level of debt.

Recent Problems and Management Commentary

In their Q4’23 earnings, BDX’s management said that they are expecting a stronger 2024 than previously forecast because they have worked to accelerate their innovation pipeline, improve their supply chain, and are focusing on creating value for their shareholders. They noted that their Medical and Life Science segments have performed very strongly this past year, despite a recent decline in China.

However, they expect to see some challenges with their interventional segment, especially because of some volume decreases they are seeing in the United States due to supply chain issues.
Management mentioned their continuous improvement in the supply chain, which will help them with delivering quality products to its customers. They also talked about focusing on efficiency and cutting costs to achieve better profitability.

BDX seems to have a very good track record of innovating and quickly launching new products and are heavily investing in digital technologies, which should increase efficiencies and improve their competitive advantage.

BDX also seems focused on creating long-term value and improving their relationship with investors.

Conclusion

BDX is a reliable company with high returns on invested capital. It also has the ability to continue generating high cash flows for the forseeable future. However, it operates in a highly competitive industry and has a rather high level of debt. The company has a moat but it is not a very wide moat as there are a number of competitors who might be able to chip away at their market share. BDX seems to have more of a regional moat, where they dominate a certain geography, or a certain customer base instead of having a moat for its entire operation. All of this makes BDX an excellent but not a very “safe” investment. You should watch BDX closely as its debt load and strong but limited moats might become a point of concern in the future.