Yanira GarciaBecton Dickinson & Company2015

BDX Equity AnalysisYanira Garcia

Executive Summary

Sell – My final recommendation for Becton Dickinson & Company is for investors to sell the stock, as this company and industry are going to experience turbulent times soon. The signs that lead me to believe this are:

I. Decreasing MarginII. Increasing buyer power

III. Increasing R&D cost

Within their industry, Becton Dickinson comes in at number 5 based on revenue. Regardless of their high standing, one main reason for selling is the decreasing margins. One should be ware when investing not only in BDX but this industry as a whole because this seems to be an issue across the board. While sales are expected to grow at a high rate for a few years due to baby boomers aging, these sales should be offset by increasing R&D cost. Thus the margins should continue to decline as they have in the past especially since buyer power is expected to increase as well in the near future.

BDX valuation

As I continued my analysis I found that BDX is overvalued relative to the firm and fairly valued for the most part relative to their industry. For this analysis we focused on many ratios including P/E, EV/S, P/B and P/CF. Figure 49 contains a summarization of all the ratio valuations and how BDX stood

next to the entire market as well as to their corresponding industry the S&P North American Health Care Equipment (S5HCEP). According to this analysis you should sell when compared to the market and hold relative to their industry. The fact that BDX is fairly valued relative to their industry leads me to believe that this industry as a whole is overvalued when compared to the entire market. So this

Relative ValueMarket Industry

P/E Over Valued Fair ValuedEV/S Over Valued OvervaluedP/B Over Valued Fair valuedP/CF Over Valued Fair valued

To verify my thoughts on BDX being over valued I completed an analysis which tells me what BDX’s is actually valued. I completed a best worse and base case scenery. As we can see in Figure 40, even the best case scenario was barely 18% above the current price while our base case is over 36% below our current price.

Current = $148.68 Best Base Worst

Dividend Discount Model $120 $70.15 $48.10

Cap Earnings Model $63.82 $59.72 $54.59H model $211.91 $107.0

8$64.63

Average price $175.91 $94.44 $60.64Upside/base/downside 18.31% -36.48% -59.21%

Figure 49

Figure 40

A third indicator of selling this stock was provided through a regression analysis. I used BDX’s main competitors in the index S&P North American Health Care Equipment (S5HCEP) which resulted with Figure 51. As we can see in this graph, BDX is slightly above the linear barrier separating the rich stocks from the cheap. This graph also allowed us to see that BDX is not the best investment within our industry and that there are companies trading cheaply within this same industry that may be a better investment.

4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 100

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BDX

Chart TitleBDX fairly valued within the industry

CHEAP

RICH

Figure 51

Lastly in order to get a fourth and final indicator of sell recommendation I decided to take a technical analysis approach. As you can see in figure 54, BDX has surpassed the RSI limit of 70 a few times within the last year, meaning that it has been over traded. As we get closer to present times we see that BDX recently surpassed the 70 benchmark once again in November and has maintained at a high level signaling a sell recommendation as well.

All analysis point to BDX being over valued and signal a strong sell recommendation despite the revenue growth forecasted

Figure 54

Industry Analysis The health care equipment and supplies industry is very large and contains multiple segments. For the purpose of this analysis we will focus solely on medical equipment segment.

The Federal Food, Drug, and Cosmetic Act of 1938 defines any medical device as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar article that is intended for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease.”

Big Players

After some financial analysis I found that the biggest competitors within this industry based on revenue are the following (ranked in order):

Company Revenues 2014 (million)

While these numbers do look decent, how has market share changed over time? Well if you look at the graph below we can see that the industry is certainly changing. It appears to be that the largest firms are slowly beginning to shrink as far as market share and that all other firms are beginning to take a large portion of market share when combined and that all of these top 5

firms are slowly falling. This can be attributed to studies that have confirmed that small and midcap companies are the driving force of innovation within this industry.

As we can see in figure 1 the smaller firms are beginning to grow and the bigger firms are shrinking. Since the bigger players are losing market share that means that buyer power may increase due to the changes.

Buyer Power

Baby Boomers!

Studies have proven that there is a correlation with age and frequency of doctor frequencies. For this time that means that we are in a great time period to be medical equipment manufactures. The reason being is because Baby Boomers are now reaching the threshold in which doctor visits become more frequent and they begin to need more medical equipment.

Market Share changes from 2005-2014 based on sales Revenue

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ABT MDT BAX SYK BDX Others

Figure 1

1. Abbott Labs $20247

2. Medtronic $17005

3. Baxter Int. Inc. $16671

4. Stryker Corp. $9675

5. Becton Dickinson $8446

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Percentage of US population with hospitalization in past years by age group

65 years and over 45-64 years

18-44 years

Percentage of U.S. population

Year

Figure 2

According to the Census Bureau the 20 century is going to show amazing growth in the elderly population (65+ years) Figure 2. The first wave of baby boomers is expected to reach the age of 65 in 2011 and by 2030 this population will have doubled from the current normal range of 35 million to 72 million.

The rapidness of this age population growth is illustrated below. As you can see in figure 3 there is very rapid growth from 2010 through 2030. After this time period it is apparent below that the growth rate will decrease.

Since elderly people are key consumers of products, that means that change is on the way. This means that demand is going to increase. Not only that but we can expect companies to get more competitive for innovations in the industry in order to gain these customers.

GPO

One big disadvantage for manufacturers is the creation of GPOs. These are organizations that combine orders of small businesses into one large order. Some of the biggest and best known GPOs are Amerinet, Med Asset.

These organizations bring a lot of power to smaller business, because they bigger the order, the better the deal they receive on the merchandise. In 2013 business who purchased through organizations such as these received in sum a total discount of over 1 billion.

As the example above demonstrates, these organizations provide much more buyer power for businesses that do decide to go through a GPO.

Awareness

Customers are becoming a lot more knowledgeable about products and prices. This is mainly due to information provided by new e-procurement systems. This is thus leading for more cost friendly products and competition to maintain customers. We have seen in the past that customers are more cost conscious. This was greatly demonstrated during the recession that took place back in the 2000s. During this time we saw a decrease in income derived from disposable equipment and supplies.

Overall Rating: High

Figure 3

Supplier Power

HIPPA

One big concern that has come up recently within this industry is HIPPA. Medical companies are having trouble keeping patient information confidential due to numerous events of hacking taking place in the industry.

This hacking issue is a major concern because it can lead to identity theft of the patients.

The only solution that manufacturers can find is to make sure that they have reliable and safe suppliers and business partners. This will increase patient safety and privacy. This thus increases supplier power and reduces the manufacture’s power.

Reputation Effects

Since there are multiple raw material suppliers, it can get kind of hard to compete for customers. But being the fact that they are dealing with medical industry makes it a lot tougher and suppliers must differentiate their product from the rest. The way that they do this is through reputation.

The medical supplies industry is heavily regulated for patient safety. For this very reason manufacturers prefer to go with suppliers who have good reputations about safety and cleanliness of their product.

The advantage of good reputation gives these suppliers the upper hand on price negotiation since manufacturers are willing to pay higher price for quality.

While manufacturers do have many options when it comes to suppliers, quality limits their options. This therefore raises supplier power from low to moderate.

Overall Rating: Moderate

Threat of Substitution

As of now this does not seem to be a big concern to this industry. There is nothing that really seems to even come close to be considered a substitution, but that may change with time as the technological and medical industry continues to revolutionize.

Overall Rating: Low

Threat of New Entrants

Evolution

Research and development is key in this industry. Whether it be to create new products or to improve on existing ones. If a firm wants to stay competitive it must invest in their R&D department.

Since R&D is constantly leading to innovations and different products, meaning that the technology in the industry is always evolving as well. This makes it difficult for new aspiring competitors to enter the industry.

Not only is it difficult for them to stay up to date with the technology as far as knowledge and experience wise, but also financially. A incoming competitor has to focus its investments in the research department in order to set it aside from the current industry. Thus the constant technological advancements can end up being costly to a firm that truly needs to focus solely on R&D. Technology is not the only huge factor here, but regulation is very heavy on this industry as well.

Drive out

As stated earlier this industry is dominated by large international companies. This means that they have the ability to drive down their prices in order to beat out the new entrants who do not have the ability to compete with these prices.

ACA

The affordable act plays a big role for new entrants. It is a force that discourages many from even attempting to enter the market.

ACA places a 2.3% tax on total sales of taxable medical devices. This high tax has already affected the big players, and is a huge disadvantage for new entrants.

Coming into a market you want to attempt to gain some sort of market share. The affordable care act makes this even harder within this industry because it increases cost, thus affecting overall profitability.

FDA

The FDA is another hurdle which new entrants must face. There is a very long and expensive process in place by the FDA in order to be able to market an item to the public. The process flows in the following direction:

1. Pre-sub:

Clinical trials are very expensive and be a complete waste of time and money if not passed. These are done to assure that materials and devices are safe for consumers

2. IDE

This is the request sent to the FDA in order to receive approval for clinical trials.

3. PMA :

This is the step in the process where the company request market approval.

4. PMA-S:

This stage is to approve changes to existing, approved devices.

This 3 stage process is not only long but expensive and really takes a toll on emerging companies.

Switching cost

Switching cost is surprisingly low. Not only that, but suppliers are very accessible making for an ideal environment for new entrants.

Due to all of the fees and regulations as well as all other issues discussed in this section, I would consider the overall threat of entry as:

Overall Rating: Low

Rivalry

Diversity

While all forces of porter are very important, rivalry is a key force. If rivalry is fierce then the structure of the firm can be affected.

The good thing about this industry is that it is composed of many large scale international companies. This means that many of these companies are very diversified in products and operate in many different industries. Due to the diversity these companies can actually negotiate on price of products offered.

The diversity of the larger scale companies and the different sources makes for little to moderate rivalry within the industry.

Expansion

As stated in the overview of the industry, there are many big international competitors. Their constant R&D is always leading to improvements and allows firms to expand geographically. Not only that but it allows these expanding competitors to even tap into emerging markets all over the globe.

Overall Rating: Moderate

Issues:

ACA

The affordable care act was signed into law back in March 2010. This law was designed to help American’s all have access to medical insurance. A portion of being able to do this is the tax that was placed on manufactures of the medical equipment and supplies industry.

The affordable care act placed a 2.3% tax on medical equipment & supplies manufacturers. This has lead for the subindustries to align their cost structure to help offset the tax impact. Along with that Net Advantage said companies could make tax manageable because the levy is tax deductible.

A lot of companies have appear to have taken a different path when attempting to lower the impact of the tax. One of the very negative budget cuts that we saw was that from the Research and Development department.

This budget cut really effects the industry, because in order to meet increasing demands, innovations need to happen. Cutting the research and development budgets for companies, does not help develop innovations.

Smaller companies are the ones that have shown to be most affected by the Affordable Care Act. One key thing for these companies is the opportunity to innovate and to try to rise and grow but this additional tax is reducing their opportunities just as all other companies within this industry.

A study conducted by Avamed showed that 10% of companies have moved manufacturing operations out of the US. This in turn has caused for 14,000 jobs to be eliminated.

The most devastating result from the research conducted showed that the majority of new enrollees will be younger and less likely to need medical devices. This means that there is not really any benefit for companies and there is a higher risk of this causing them to lose money in the long run.

Middle Man

One big issue within this industry is the use of a middle man. The customers for these firms are other businesses: hospitals, nursing homes, acute care facilities, etc. The problem comes in because they are not the actual consumer of the product. Instead they are simply the middle man.

This is an issue because without realizing it these middle men are actually a reflection of the industry, but much more of the used manufacturer. If the provider has trouble with the product, the patient may think that

the product is terrible and defective when in reality the provider simply needs training upon the product.

Another example can be when other patients misuse the products as well. Unfortunately, there are some patients that reuse needles even though they are told not to do so. Sometimes because of this, they obtain an infection and can attempt to blame the manufacturer. This can greatly affect the manufacturer. Even though their product is great, the patient will state other wise to those around him which can cost sales for the manufacturer.

Economic Change PPI

Jan-05Jan-06

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100.0110.0120.0130.0140.0150.0160.0170.0180.0190.0200.0

Producer Price Index for Medical Equipment and Supplies manufacturingcompared to Total Manufactur-ing industry 2005-2014

Medical Equipment & supplies

Total manufacturing in-dustries

month &year

Produ

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Figure 4

The Producer Price Index (PPI) Figure 4, gives us insight on the producer side of inflation. The PPI measures the average range of selling prices that producers receive for their products over a span of time.

At the beginning of this section, we have a graph comparing the PPI from the medical equipment industry to the entire manufacturing industry. As we can see both show very different trends. While the Overall manufacturing PPI shows a lot of volatility over the years, the medical industry PPI does not.

The medical industry PPI appears to be very stable but steadily growing. Another major concern is that the PPI reported for each of these seems to be drastically different from one another. This may also be due to what exactly the Bureau of Labor Statistics includes in this analysis. If it is manufacturing goods that are a lot more expensive then the medical equipment, then of course we can expect this drastic gap.

Now as I stated earlier, the medical equipment and supplies trend seems to be very stable which is great for investors. We also see it is steadily increasing and when it does fall, it does so just slightly. So we can be assured there are no crazy jumps such as in the total manufacturing industry, making for a safer investment.

We can predict that these trends will continue and that we will continue to see a growth in PPI and we can be assured that it is a lot safer than other manufacturing industries as demonstrated from our graph.

Over View

As you can see all throughout the analysis there is a constant push and pull effect going on. Every time we find a good attribute to this industry we find a bad one as well.

The key to this industry is safety. If safety and quality decrease within this industry

then the firms will fail and can cause for the entire industry structure to fail. The supplier power that exist only does so because manufactures have to assure the quality of their products for patient safety.

One of the major issues with this industry is the Affordable Care Act. This law has flipped this industry. As seen earlier in this paper there is not much rivalry for this industry due to the diversity. But the affordable care act increases rivalry in a sense, because the new enrollees into the market are scarce. That paired with cut research and development budgets is certain to raise the level of rivalry.

The last and final major concern with this industry is branding and the middle man. Providers fail to realize that their use of the product reflects the overall company in the customer’s eyes. If customer’s see a product as unsafe they can potentially sway the provider to switch manufacturer by denying them their business if they do not.

Overall, all portions of the Porter analysis seem to be in great shape. There is no red flag on this industry. And it is a great signal that there is absolutely no threat of substitution.

Rivalry:

Moderate

Substitution Threat:

Low

Threat of New entrant:

Low

Buyer power:

High

Supplier power:

Moderate

Company Overview

Becton Dickinson is among the top 5 companies as shown in our earlier analysis based on Sales Revenue.

Within its industry, Becton Dickinson is one of the major competitors. Based on Market Capitalization, BDX falls in at number 4 with a market cap of $30,451 According to the Russel 3000.

Market Share/ Competitive Standing

To determine market share, we will take a look at revenues for the top 5 companies in the industry. There are many small firms within this industry that make up 82% of the overall (Figure 5) industry as seen below. BDX only makes up 2% of the industry when analyzed by revenue.

5%4%

4% 2%2%

82%

BDX makes up mere 2% of entire industry

Abbott LabsMedtronics Baxter StrykerBecton DickinsonOthers

Figure 5

To get a better idea of how BDX stands among competitors we will look at the top 5 within the industry, which BDX does fall into (Figure 6).

28%

24%23%

13%

12%

BDX makes up 12% of total revenue for top 5 companies

Abbott Labs Medtronics

Baxter Stryker

Becton Dickinson

Figure 6

As we can see, Becton Dickinson does make the top 5 companies within the industry but is the smallest of the 5. This analysis was done of revenue. In 2014 Becton Dickinson brought in $8,446 while the top company, Abbott Laboratories brought in $20,247. As you can see there is a big gap between the top company and Becton Dickinson a total difference of $11,801.

What sets BDX aside from the competition is their specialty in needles. BDX is consistently innovating the needle in many ways including length, width and safety. To be more specific BDX is the top competitor for diabetic needles. They specialize in needles for diabetes care and providing safety and comfort to the patients.

World Wide Presence

BD is not only a US company, but also has different business entities all over the world including:

North America Europe South America Middle East/ Africa Asia/ Pacific

As we can see above (Figure 7) the region that produces the most revenue is that of U.S market generating over 3.4 billion. As noted at the bottom the “Other” is composed of Latin America, Canada and Japan. This is one of the benefits of a large corporation, that it is not solely based in one country and has the ability and resources to expand to other regions.

BD Branches

Becton Dickinson like many of the competitors in this industry is actually quite diversified in the products that they offer. In total they are composed of 3 different sectors: BD Medical, BD Bioscience, BD Diagnostics.

BD Medical

This is actually the largest portion of BD as a whole as far as revenue goes. This portion

includes all medical items, ranging from needles and syringes as well as catheters to drug delivery systems. The biggest items for this sector are syringes and needles as well as sharps disposable containers. The biggest customers for this sector of BD include hospitals and clinics.

BD Bioscience

This section of the company is focused on tools to help with research. More specifically, they make tools to help with the study of cells. They specialize at the cell level so that they may understand disease and prevention at a better level. The information provided by these tools is then used to help develop vaccines or treatment drugs. Their main products include: cell analysis kits, florescence activated cell sorters and analyzers, cell imagining systems and a few other products. The main customers include research facilities as well as government agencies.

BD Diagnostics

This BD branch is the second largest as far as revenue is concerned. This area is focused on collecting specimens and samples and transporting them in a safe manner. Not only that, but they also focus on detecting a broad range of infectious disease. Some of the products include: automated blood cultivating systems, integrated specimen collection systems as well as plated media and other products.

Figure 7

The customers for this branch, range from hospitals and clinics as well.

All Segments have different customers. With this being said the most common for each segment and the biggest customers for BD are hospitals and clinics since they buy in medical supplies in large quantities more specifically disposable medical supplies.

Below is the breakdown of Revenue (Figure 8) by segment from the 2014 annual report.

History

Becton Dickinson began with two businessmen. Both Maxwell W. Becton and Fairleigh S. Dickinson were on a business trip when they first met in 1897. After a long train trip they decided they wanted to go into business together, thus creating Becton, Dickinson and Company. Along side

1906 was a huge year for BD. It was in this year that Becton Dickinson took a huge step and became incorporated in New Jersey. Not only this, but they opened up a manufacturing facility, which became the first built specifically for producing thermometers, hypodermic needles and syringes.

In 1924 BD made its first syringe designed specifically for diabetes care, which set the pace for its dominance in this specific field.

In 1948 the sons of the founders took over the company and expanded BD worldwide. Along with that they began the research to transition into disposable products which eventually took place in 1950. In 1962 BD finally became a publically held corporation beginning. It’s first shares were priced at $25 a share.

1972 was another major year in that it was the first time that the Fortune Magazine listed BD as one of the 500 largest American Companies. In 2005 they were also recognized and included into the Dow Jones Sustainability Index North America.

These are just a few of the major milestones that the company has accomplished.

Management

I will cover the most important (in my opinion) corporate officers for BDX.

CEO : Vincent A. Forlenza

He also holds the position of President and Chairman. He has worked with BDX for over

Figure 8

30 years and has worked in many areas including marketing, has worked in oversea roles, and general management roles in all 3 segments and many other roles within the company.

CFO: Christopher R. Reidy

He is the executive of management and oversees BDX global financial operations as well as shared services. He comes to BDX with much experience having been CFO for ADP NBA properties, and many other companies. They believe that with his experience and BDX strategies, the company can maintain its competitive advantage for the future.

Global Strategy Development: Amita Bhalla

Amita works alongside John E Gallagher (Business Planning & analysis & treasurer) to develop expansion plans such as where to locate new plants if needs or new service centers or different things of the nature relating to expanding into different areas of the world.

Research & Development and Chief Medical Officer: Ellen R. Strahlman, M.D

Research and Development is a major factor of this industry, which is why I wanted to mention Ellen R. Strahlman. Without her guidance and leadership BDX can plummet in performance if R&D fails.

Chief Ethics and Compliance Officer: Patti E. Russell

Mrs. Russell holds a very important position. Another major issue in this industry is safety along with ethics since we are dealing with the

medical industry. If we fail in this department, it can be the end of BDX.

Every position within BDX plays an important role but I find that these are the positions that exceed others and that as a company they need to assure are completing their duties to the best of their abilities.

Strategies

CEO Vincent Forlenza, describes the medical field as fast paced and constantly changing. Do to this he has put together many strategies that combined should help BD flourish and prosper and adapting quickly even during uncertain futures. Below I will talk about these strategies.

One step that has been taken is the use of Research and Development funding. For the most part BD has historically used this funding to extend product lines. Now, they are focusing on building complete new products using both internal and external creative sources.

Along with that BD is building partnerships with many other people. Doing this gives BD the access to some of the world’s best technology, science and entrepreneurs. He says that the overall goes is to “create a portfolio of partnerships comprised of small financial investments with opportunities for deep, hands-on engagement and strategic exploration.”

Lastly the major portion of BD evolution is the use of acquisitions. They plan on using acquisitions to their full advantage,

meaning not only for geographical expansion, but also for product innovation.

They believe that these combined along with other smaller strategies will take BD into the future. And potentially make it a top leader within the industry for years to come.

SWOT Analysis

Strengths

The expertise of Becton Dickinson is focused on injection, therefore needles. They started with glass syringes and now are the creators of the world’s smallest pen needle. Another area in which they lead the market in is that of infusion based drug delivery. Both of these factors combined give the company a competitive edge on the market.

Acquisitions are something that Becton Dickson has taken advantage of. They have acquired companies that help maintain the competitive advantage discussed above.

A major advantage held by Becton Dickinson is the fact that they are a global company. Many of the companies within this industry are fairly smaller and therefore don’t have the capital and other resources to expand overseas. This creates less dependency risk for BD which of course is a major strength.

Now one big advantage that separates BD from its competitors is its financial flexibility. BD is hardly ever in debt and is

very good about keeping cash on hand at all times.

Weakness

BD has taken on a lot of debt due to current acquisitions. Thus weakening its strength mentioned above. For the first time in many years BD had to take out a loan in order to be able to pay for an acquisition and that was the one pertaining to CareFusion.

Another weakness for BD is a common issue addressed earlier for all firm’s within this industry and that is brand imaging. Any recall or misuse reflects the brand BD, which of course can affect sales overall.

Opportunities

BD’s opportunities all stem from different acquisitions. Example, the recent acquisition of Carefusion provides the opportunity for BD to become a leading company in both medication management and patient safety solutions.

Acquisitions of CRISIS medical Systems gave way for BD to tap into another market; the injection safety. These are simply two of the bigger acquisitions that will have the biggest impact on BD.

Threats

The ACA was a major threat to many companies within this same industry, but BD has prevailed. Now the pressing threat is that of a healthcare reform. A healthcare reform can have a very negative impact and

lead to a decrease in demands for their products.

Of course another threat is one of the five forces examined in Porter’s analysis. That threat is the threat of rivalry. This can affect BD just as it would affect any company within this industry by forcing it to drive down prices and lead to lower profits.

The last threat that can be perceived is one that every business faces. That is the threat of prices changes in supplies and raw materials. These can affect profit margins as well. And lead to less funding for R&D and can lead to a downfall within this industry.

Thoughts on BD

Overall, the company appears to have a good outlook on it. From past reports we see that their revenues are consistently growing and that growth is expected in years to come.

CEO Vincent Florenza also does have many ideas to keep the company in a competitive position within the industry not only now but in the future. It seems to be a well thought out strategy that will bring BD into the future. One major component that I believe will be the key, is the use of funding for new products instead of line extensions.

The only caution that I can see with this company is the volume of acquisitions. While acquisitions are very common within this industry I just suggest that BD keep the acquisitions to companies that they can truly benefit from.

Not only should they be more conscious about whom they acquire but how they acquire them. The transition process for BD is not as clear and leaves a lot of unanswered questions. So BD can potentially have a great buy but if they cannot successfully merge, then it can have a disastrous impact.

Financial Analysis

In this paper I will perform a financial analysis of Becton Dickinson based on the financial data provided by Bloomberg. I will start by assessing Becton Dickinson’s short term viability, looking at key measures of liquidity and solvency. I will then turn my attention to Becton Dickinson’s long term prospects for growth. This will be done by, looking at key measures of top line growth (turnover) and bottom line growth (margin).

First, looking at the short term viability of Becton Dickinson staring with liquidity, I believe there are four important points that can be made from the financial data:

1. Becton Dickinson’s cash from operations (Figure 9) has been growing at a slow pace of 5.01% (CAGR since 2007) while its Earnings before Interest and Taxes (EBIT) is growing only 3.68%. Generally it is a good sign that CFO is growing faster than EBIT, pointing to evidence that earnings are “economic” (that is, not propped up by accounting accruals). So I see this as a good sign for both liquidity and quality of earnings the concern is that these growth rates are so low. When compared to the competition ABT Laboratories, BDX actually has much higher growth rates since the competitor’s CFO and EBIT actually have an overall negative growth rate.

2014 2013 2012 2011 2010 2009 2008 2007500

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1,900

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EBIT and Cash from Ops show positive signs for liquidity and quality of earnings

Earnings before Int and Taxes Cash from Operations

Figure 9

2. At points in time there are differences in the trends for CFO and EBIT, especially occurring in 2013 (see graph 1) This raises questions about what possibly happened in 2013 to cause this major fluctuation. In further analysis we took a look at the Net Working Capital Requirement, one can see that in 2013 Working Capital Assets rose slightly as in previous years while Working Capital Liabilities grew at a much faster rate. Analyzing the information as a whole we see that overall Working Capital Liabilities is growing at a higher rate of 6.92% while working capital assets are only growing at 4.66%. This is causing the Networking Capital Requirement to fall and thus cause, Cash from Operations to fall while EBIT rose. After additional research the only thing that found to explain this is the fact that the company underwent a system change. They switched their software for financial reporting. This is the only major difference seen in the annual report which can lead to the increased Working capital Liabilities.

3. Looking more closely at the Net Working Capital Requirement, we see that Working Capital Assets are greater than Working Capital Liabilities,

which means that the Net Working Capital Requirement is a use of cash rather than a source of cash. This is the normal situation for most companies, so the more important question related to liquidity is, what is the trend in the Net Working Capital Requirement? What does catch my attention is that Net Working Capital Requirement is only growing by 1.87%, a much slower growth rate than Revenues, EBIT and Net Income. I should point out that this may also be distorted by the increase in Net Working Capital Liabilities discussed in #2 above.

4. Looking at Return on Common Equity (Figure 10), we see that Becton Dickinson has been consistently paying out to share holders. Along with always paying out, the amounts have increased over time as well showing the growth. Now one major year of concern is the year of 2014. There was a decrease of 17% on the ROCE. This is a major downfall and major concern because this averaged out with every other year shows that over time this is just an average growth of 1%.

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ROE consistantly growing up till 2014 bringing overall average down.

Median 10 Percentile 90 Percentile Becton Dickinson

Year

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Figure 10

Next, looking at Becton Dickinson’s solvency, I believe there are three important points that can be made from the data:

1. First, looking at Times Interest Earned, we see Becton Dickinson reached a really high ratio in 2009 reaching 41.68. While this is great that they have the ability to pay interest charges this many times it does raise concerns as to why they are not using this money for other things such as developments. Since then the ratio has been declining to the most current 10.11 in 2014. As of now this ratio does not raise any concerns about Becton Dickinson’s insolvency but if it continues to take such dramatic plunges as in previous years then it can raise some major concerns.

2. Second, looking at Becton Dickinson’s Debt-to-Equity (Figure 11), we see the ratio began to rise rapidly in 2011 going from .31 in 2010 to .56 in 2011. 2012 was a significant year because it almost doubled to 1.01. Debt has been growing at 19.17%, which is faster than their growth in earnings and assets.

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We also see in 2012 that there was a major repurchase of stock, but we also see an increase in debt. This means that while BDX was able to repurchase stock it did so by taking on more debt. The debt to Equity ratio has fallen since to .70 but is still considerably high when compared to previous years prior to 2012. We need to watch this trend to see if their debt to equity ratio balances out. We should also be aware of any strategies expressed by management to handle the growth in debt. Further, we can see that Becton Dickinson’s debt to Equity ratio is significantly higher than Abbott Laboratories who is a major competitor for BDX.

3. Third, Becton Dickinson’s Combined Financial Leverage showed a slight increase in 2012. Since the ratio has since declined, there are no red flags. Also since this ratio includes all liabilities, the increases in debt may be possibly be offset somewhat by the decrease in Working capital Liabilities account in2012. But we see that this event in 2012 did indeed put Becton Dickinson above Abbott Laboratories (Figure 12) when it comes to combined financial Leverage. They have since come down but are still above

ABT. This requires further research as not enough details are provided here.

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4. Fourth, BD’s Debt to EBITDA ratio. This ratio gives us an insight to the likelihood of the firm being able to repay its depth. As we see in Figure 13 below, Becton Dickinson follows the industry median. This is great because it means that BD is not seen as incapable of paying its debt off. As we can see the lower 10th percent of the industry is quit alarming when it comes to this ratio. When measuring Debt to EBITDA, the higher the ratio, the worse. The top 10% of the industry has an extremely low ratio when compared to the lower 10%.

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Now one very interesting points to make is that it appears the BDX appears to follow the complete opposite behavior when compared to the market. If you look at graph 5 you can see that while the rest of the industry is either rising or falling BDX does the complete opposite. Example, look at 2010. All other portions of the industry rose, while BDX actually fell. This may be due to the fact the BDX is known for carrying larger amounts of cash thus leading to fewer loans during a crucial time period.

Credit Rating To obtain second outlook on the company I researched the company a little more on Bloomberg and found that Becton Dickinson’s credit rating was scored at a BBB+ by both Standard & Poor’s as well as the Egan Jones Rating Company. Moody’s ranked them in at Baa2. All of these ratings seems to indicate that Becton Dickinson is a lower medium grade investment, thus reinforcing my speculations about their stability.

My final conclusion on Becton Dickinson’s short term viability is that I do see some possible areas of concern. There is a lot of volatility for its ratios and does not seem to be consistent within the past few years. The one trend to watch is the growth in debt, as debt has been growing faster than revenue and earnings. However, debt is not at a level at this point to raise serious solvency concerns for Becton Dickinson. We just need to keep a watch ratios concerning debt such as debt to equity as well as Net Capital Liabilities.

Now I will turn my attention to Becton Dickinson’s long term prospects for growth, starting with an assessment of Becton Dickinson’s top line growth (also known as turnover). There are 3 points I want to make here based on the data provided:1. Revenue growth has been positive but not great. We do see a fall in revenue from 2008 to 2009, most likely attributed to the financial crisis of 2008. Overall Revenues have grown an overall 4.14% from 2007 to 2014. 2. Important with any business is to

assess where this growth is coming from. Looking at Becton Dickinson’s growth in terms of revenue per square foot is not possible so the best way to asses them is in terms of property plant and Equipment. When analyzing Becton Dickinson’s records we find that Revenue per PP&E ( property plant and Equipment) actually decreased but the PP&E ratio itself is the one raising the revenues. What this means is that the growth in revenue is more than likely coming from Becton Dickinson opening up another plant. What is bad news though is

the fact that opening up this new plant appears to have actually brought down the revenue per PP&E, which means that it is very likely that this additional plant was unnecessary.

3 .Becton Dickinson’s Asset Turnover (Figure 14) has been slipping the past couple of years. While this is a concern, it does not raise any red flags, because as we can see this trend is followed by the entire industry not solely BDX. It is somewhat comforting to know that they are right in line with the top 10% of the industry in Asset Turnover.

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If we continue to analysis the data it becomes apparent that over the years the gap between the top 10% and the lower 10% was widening, but since 2010, that gap has begun to shrink. The top 10% Asset Turnover is falling, while the lower 10% isexperiencing the opposite and is on the rise.

Another major ratio for this industry is that of Inventory turnover. I wanted to analysis how long inventory is in storage before getting it out

to customers and how Becton Dickinson compared to competition. To my surprise Becton Dickinson is actually doing really great in this ratio (Figure 15) and keeping up with the top 10% of the industry as shown below. This boosts my perception on their ability to generate sales even though it has been falling. This signals to me that this is an industry problem and not only being experienced by Becton Dickinson.

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Now I will turn my attention to Becton Dickinson’s long term prospects for growth by looking at margin. Here I want to make 3 points:1. Looking at Gross Margin (Figure 16), we see that there is volatility and not consistently growing or falling. But we also see that gross margin hit an all-time low in 2014 coming in at 50.9%. This is concerning being the fact that it is even lower than it was during the financial crisis in 2008 where the gross margin came in at 51.2%. Overall the gross margin comes in at -.22% which means that the declines are overpowering the increases in gross margin.

As we see Abbott Laboratories is doing better than BDX in this ratio. Not significantly better but it is important to note that their gross margin is falling at a -.33% rate and are still above BDX. Even though ABT still has a higher percentage it is apparent that the gap between both companies is closing.

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2. Becton Dickinson’s Net Margin continues to raise concern as we see that it has been deteriorating since 2011 (Figure 17). It reached an all-time high in 2010 at 25.14% and has consistently fallen to the most recent recording of 20% in 2014. Showing an overall growth of -.44%.

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3. Becton Dickinson’s overall Return on Equity, as shown in Graph 10, has consistently been above Abbott Laboratories since 2010. This is impressive because the difference in ROE is significantly larger than the small differences in combined leverage (Figure 18). This points to signs of that such high ROE is due to good management of turnover and margin and is not exaggerated line growth.

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To summarize long term growth prospects (Asset Turnover and Margin), I believe Becton Dickinson has done a very good job keeping up with top competition as far as asset turnover. Even though they are getting close to closing the gross margin gap seen in graph 8, it is not much due to their performance but the fall in the competition’s performance. Looking at ATO Times Net Margin in Figure 19, we can see that Becton Dickinson is still stronger on this view of combined growth (top line and bottom line), but because of the deterioration on Net Margin, ABT looks like they will begin to close the gap in the near future.

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My biggest concern for Becton Dickinson is the fall in the Net margin. That combined with the increase in Net Operating Liabilities raise major concerns for me. They seem to be able to keep up with their debt thus far but seeing how the net margin is declining it’s a question of how long they can continue to sustain their debt. They need to work on increasing their net margin as ABT appears to be doing and continue to try and decline their debt levels. I was very surprised to learn that BDX has such levels of debt due to the fact that the company prides itself on holding large amount of cash at a time and according to them holding little debt as possible.

Figure 19

Forecasting

As stated earlier in my macro analysis we see that baby boomers are expected to have a major effect on the medical devices and supplies industry. A very small portion of this population is expected to reach the 65+ age group within the next 5 years. Most companies within this industry are preparing for long term growth to capture this population. We can see the Becton Dickinson beginning to take measures to be competitive in the future market, but the biggest impact will not take place until sometime between 2020 and 2030.

Revenue

The two main factors that I am attributing to revenue growth will be research and development as well as aquistions.

As covered earlier in paper 2, the main component of this industry is research and development. Without innovations and success in research and devlopment Becton Dickinson will not be in a competetive standing in the future. We can see that they are currently focusing on this and are currently investing heavily in this department. It currently has a rate of about 11% and I predict this will be slowly increasing over the next 5 years. Till hitting about a max of about 11.70%

The change in revenue described above is not solely from research and devlopment but from acquisitions as well. I am predicting small acquisitions will increase in this industry because small companies are

expected to attempt to enter this market with innovations to capture that growing product demand. As revealed in paper 1 by Porter’s 5 forces, this industry is infact a hard one to enter and small companies that are able to enter usually get bought out by the bigger companies. For this very reason I believe Becton Dickinson will take part in acquiring incoming small companies making a constant growing rate ranging from about 1-2% in the next 5 years.

Taking both of these growth factors into consideration I am predicting the current revenue of $8,846 to grow to $14,247. This calculates to be about a 13% growth rate throughout the next 5 years. This falls in line with the trend of the companies revenue as shown in (Figure 20). Of course the majority of this growth stemming from the increased sales from research and development.

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Continuing down the income statement, I am forecasting that both my Gross margin along with my COGS will be increasing. Even though I am predicting both to rise, I expect my overall gross ratio to decline over time.

As we can see in the gross margin ratio graph (Figure 21) gross margin has been volatile over the years, and decreased in 2014. I am expecting a continued decrease due to the increase in buyer power associated with the increasing demand. In 2019 I am predicting it to reach an all-time low in the previous 10 years at a 50.5%

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Even though gross margin ratio is decreasing we can see in my gross margin forecast below (Figure 22) that gross margin will actually be increasing at a small decreasing rate. We see that the reason that Gross Margin is increasing while gross margin % is decreasing is because COGS is growing at a slightly higher rate than the gross margin itself. The growth in COGS is offset though through the increase in revenue. My forecast shows a peak in 2019 reaching an amazing 7,900, which is almost double the gross margin in 2012.

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Figure 22

Continuing to look into the income statement forecast we take a look into operating expenses which of course tie into my COGS which will be on the rise, therefore my operating expenses are on the rise as well, not only in amount but in total percentage of revenue as well. I am predicting a smaller growth then COGS and predicting a total growth of about 1% over each year, percentage wise. Operating expense will be increasing at a lower rate than the revenue which is causing gross margin to increase even if my gross margin ratio is decreasing.

Interest Expense has been historically low up until 2012 when it jumped from 3.02% to 4.48% and eventually hit the highest in company history in 2015 at a total 5.14%. I am forecasting interest expense to go down in time due to the fact that management has discussed bring debt doubt for the future. Even though this was discussed, I am still predicting an record breaking interest expense of 5.2% due to the fact that the company recently took on a major acquisition in which it had to take out additional loans, thus increasing interest

expense. Over time though we should see a decline in interest expense as management is making it a priority to tackle this recent rapid growth in debt.

EBIT margin of course will also be affected by this decrease in tax expense. Since I am expecting tax expense to decrease, I can expect my EBIT margin to experience the same trend. As we can see in Figure 23, margin has been volatile but over increasing since 2000, but I believe this is because of the increase in tax expense along with other factors. In 2014 my EBIT margin is at 20.5%. By 2019 I am forecasting it to be at about 14.2%. This would be the lowest since 2005 prior to the financial crisis, and being a total decrease of about 31%.

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At the final income statement item, Becton Dickinson’s Net Margins have been following the exact same trend as the EBIT margins. Just as I predict the EBIT margin decreasing I am also forecasting that Net margins will continue to fall. This is all tied back to the decreasing gross margins and increasing operating expenses. It seems to be that Revenue overall is growing at a

great pace, but not enough to offset the increasing expenses.

Based on my forecasts, Becton Dickinson’s EPS is expected to grow from $5.81 in 2014 to $6.25 in 2019 as seen in Figure 24. They have been increasing every year, so I have no reason to believe they will not continue to do so. Their management believes in returning to the shareholders as much as possible while still retaining enough to grow the business. For this very reason their research and development growth is slow and steady. They do not want to reduce EPS, and instead want to continue to grow it.

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My EPS forecast is not as aggressive as Bloomberg is expecting as well as how much they should be paying out in line with their revenue growth. The reason being is that I believe they may want to invest this money else were then to jump drastically in EPS growth.

In the table below is a summarization of my income statement forecasts for Becton Dickinson & Company.

Income Statement; $M 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Revenue 7372 7584 7708 8054 8446 9544 10980 11265 12690 14302

Cost of Revenue 900 3,645 3,685 3,924 4,072 4,629 5,353 5,520 6,256 7,079

Gross Profit 3,877 3,939 4,024 4,130 4,374 4,915 5,627 5,745 6,434 7,223

Operating Expenses 2,085 2,152 2,293 2,395 2,917 3,484 4,030 4,157 4,708 5,335

Operating Income 1,793 1,787 1,731 1,735 1,457 1,461 1,535 1,588 1,726 1,888

Interest Expense 40 51 122 169 204 206 202 194 192 185

Pretax Income 1643 1,802 1,688 1,533 1,529 1,531 1,581 1,738 1,876 2.038

Income Tax Expense 411 485 417 363 236 169 232 224 354 500

Net Income 1,232 1,318 1,271 1,170 1,293 1,362 1,349 1,514 1,522 1,538

EPS 4.84 4.91 5.34 5.33 5.81 5.87 5.90 5.93 5.97 6.07

The Balance Sheet

For the balance sheet forecast I am using the same approach as used for the Income Statement. This means that I will be using percentages to show growth and total

weight of assets, debts and equity. Items such as Depreciation, PP&E, and Other Assets will be projected on a separate basis.

Assets

On the Asset side of the balance sheet, my overall prediction is that assets will begin to grow at a high rate (Figure 25). This will mainly be attributed to acquisitions as well as patents that are common within this industry.

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One thing that I wanted to mention is that along with asset growth my forecast is showing increases in inventory which of ocurse increase my COGS. If they are able to keep current asset or inventory turnover or improve on it they may be able to lower inventory levels and thus decrease COGS.

Property Plant and Equipment were the largest portion of assets up until 2013,

when Other Assets began to make up 40% of total assets and Property Plant fell to 29%. After looking at growth trends I expect that PP&E will increase slightly over the years reaching a maximum of 36%. The reason I increased it at such a high rate is because as mentioned in paper 1, technology and updated equipment is essential to this industry. So Being that they are investing so much in R&D I am sure parts of this investment will go into new equipment to keep up with the competition.

I am also expecting other assets to increase as well in forms of patents or any other misc. assets. Since research and development will be extremely heavy within the next year we can expect to see increases in this area as well. So I am forecasting these to continue to make up the largest portion of assets at 40%.

Using the information above I have forecasted total assets to be at 12,907 in 2015 and 15,592 in 2019 (graph 17).

Overall effects on ROE

Looking at ROE (Figure 26) raises concern over investing in Becton Dickinson. All the assumptions made above definitely take a toll on ROE as seen below in graph 18. ROE began to fall in 2014 and according to my forecast, will continue to do so drastically. In 2015 ROE will be at 23.4% and by 2019 will be at a mere16.8%. This is a fall of 28% which is very alarming.

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Figure 26

ATO

As assets are growing we would expect asset turnover to improve as well. My forecast (Figure 27) shows that this will be true but it will be at a much slower rate. This means that management will need to discuss a way to improve asset turnover in concordance with growth in assets. In 2015 I am forecasting a .74 for ATO and by 2019 it should reach .92, showing significant improvement, but as I stated earlier at a slower rate than assets are growing.

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ATO times Margin is expected to remain somewhat volatile as it has been in history.

2015 shows a decrease in ATO Margin and this is attributed to the increases in debt and interest expense that the company will be taking on that year due to the merger. We see in Figure 28 that even though it does decrease in 2015, it will increase but it is still decreasing compared to the current 2014 figure of 14.3% By 2019 it will be at a much lower rate of 13.1%.

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Final Thoughts

I believe the major research and development growth will be coming during this time frame and revenue will continue to grow at a smaller rate as the elderly population does settle in. The reason so much is being invested at the time is due to the change in course of research and development. As talked about earlier, Becton Dickinson is taking an approach on attempting to make new products versus product extensions. Therefore more funding is needed. So we should not expect such rapid Revenue growth past 2025.

I believe that all of these downfalls are associated to the increase in buyer power

that is to come in this market. Profit margins were so great previously that this increase in buyer power can drastically change the profit of the industry as seen in the graphs. The concern is that while buyers have power to drive down prices and net margins, the industry still has to invest a lot in research and development in order to achieve a standing within the market.

Rivalry is not a big issue within this industry as described in Porter’s analysis but it is apparent that will be changing soon with the entire industry attempting to capture more market share.

Overall it appears to be that Becton Dickinson’s profit will be falling significant but that they will be able to offset this downfall with selling more volume. Thus the companies financials will continue to grow which signify a good sign but in reality, the company will remain fairly similar to current conditions due to the increases in COGS and the fact that the company will not be able to capitalize on things such as Asset turn over to generate even higher revenues and of profits. This does raise some concerns not about the company’s ability to improve performance and lower their cost.

Discount Rate

Discount Rate

There are different models that can be used to determine the discount rate, but the most commonly used one is the CAPM model, better known as the Capital Asset Pricing Model. This model won William Sharpe the Nobel Prize in Economics in 1990.

This model begins with stating that every individual investment contains two types of risk; systematic risk and unsystematic risk. Systematic risk is the market risk that cannot be diversified in any way because it is the risk that every investor faces when exposed to the market. Unsystematic risk is the risk uniquely attributed to that individual investment not correlated with general market moves.

The CAPM formula to calculate the discount rate is as follows:

Ke= Rf+ (Mrp*β)

Rf= risk free rate

Mrp= market risk premium

Β= Beta

Risk Free Rate

Normally to get the risk free rate you can reference the current 10 year Treasury bond. Unfortunately, though this is not the case at the moment. Currently the 10 year Treasury bond’s yield is artificially low (see Figure 29).Over time, the Fed has lowered the yield dramatically as can be seen in the

graph. It is unsure when rates will rise so in order to get a more accurate measure of the risk free rate we should use the normalized risk free rate approach.

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You are able to calculate the Normalized Risk Free Rate by calculating the Nominal GDP, which is composed of productivity, labor growth and inflation. I have used Figure 3 to calculate Nominal GDP.

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Figure 30

According to the above graph we can see the forecast for all portions of the earnings growth.

Productivity: I am forecasting to be a 2%. We can expect productivity to increase due to technological advances. For this reason I chose 2% which is about the median as you can see in the graph.

Labor growth: Due to current downfalls in job reports, I will be pessimistic in estimating labor growth. Also at this point in time we are beginning to see jobs being overtaken by machines. Due to both of these factors, I am estimating a low .05% for labor growth.

Inflation is hard to determine so I decided to use the median for inflation forecast. Inflation will be 2.5%.

Nominal GDP=.02 + .005 + .025 = .05 = 5%

Now that we have the Nominal GDP (5%) we have to adjust it in order to get a more accurate normalized risk free rate. Usually you subtract any where from 50-150bps to normalize the rate. I am going to proceed to subtract 150 bps because interest rates are extremely low and have been fairly low for some time now. So this will lead to a normalized risk free rate of:

Rf= risk free rate=.035=3.5%

Market Risk Premium

The market risk premium is the premium that investors require in return for their increased risk exposure of investing in equities.

There are many different ways to calculate the market risk premium. A few of the approaches are the historical approach, the implied approach, the corporate bonds and the volatility index. For purposes of this analysis I will be using the implied approach. The implied approach shows

that the market risk premium is closely tied to the risk free rate.

The market risk premium can be calculated by subtracting the risk free rate from the expected return on stocks. We can calculate the expected return on stocks by adding the current dividend of the stock market and the expected earnings growth.

The current dividend of the stock market is taken from the current dividend of the SP500, which is currently 2.15.

Now we can calculate the expected return on stocks. Earlier we calculated Nominal GDP to be at 5%. We add that to our current stock market dividend of 2.15, thus giving us an expected return on stocks of 7.15%

Now we can calculate the MRP:

7.15%-3.5%= 3.65%

Beta

Beta is one of the most important numbers when valuing a stock. It is a measurement of the systematic risk, which was defined earlier. The beta can measure systematic risk for either a single stock or an entire portfolio.

Beta represents an equity’s or portfolio’s sensitivity relative to the overall market movements. A company with a lower beta (<1.0) is less sensitive to market shifts. A high beta company (> 1.0) is more sensitive. The S&P 500 has a beta of 1.0.

When attempting to accurately determine the beta of a security there are some main points from which to derive your beta calculation including:

1. Revenue Sensitivity

2. Operational leverage

3. Financial leverage

4. Historical Beta

Revenue Sensitivity

For revenue sensitivity we will look into how recessions affect the sales of Becton Dickinson’s items. Due to the fact that the business is correlated to the medical field, we can expect that a recession will not have an excess effect as it would for a luxury item.

Even though the effects of a recession are not expected to be high, we can expect doctor visits to drop, thus meaning their medical equipment usage will decline. This will then lead to either order volumes decreasing or order frequency to decrease.

As we can see Figure 31 below, the last recession did in fact have an impact on BDX. As we see below during the recession, the revenue of BDX did drop and has been slowly recovering. This provides additional support that BDX is a cyclical stock and not a defensive one.

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Due to revenue sensitivity, we can expect Beta to be above 1.

Operational Leverage

The company seems to have a great market standing when it comes to its operating leverage. We can see in Figure 32 that the company is well below market average.

For Gross margin they rank in at 12.7%. This means that the volatility of their gross margins is lower than 87.3% of the firms in the S&P 500 meaning that it is pretty stable compared to other firms.

The same can be said about the stability in its Net Margin. It ranked in at 19.3% meaning that their net margin standard deviation is lower than 80.7% (100-19.3) of the other companies included in the S&P 500.

They are both below the market median symbolizing their stability. Normally this would signify the security would have a beta below 1 but since we already know that beta will be higher than 1 it strengthens the assumption that beta is only slightly above 1.

Gross Margin Standard Deviation (%) S&P 500 BDX UN Equity RankMedian 3.53 1.23 12.7%90 Precentile 13.56 10th Percentile 1.06

Net Margin Standard Deviation (%) S&P 500 BDX UN Equity RankMedian 5.37 2.17 19.3%90 Precentile 57.38 10th Percentile 1.41

Financial Leverage

Even though BDX has done a great job at keeping its gross margin and net margin stable, it has run into a problem when it comes to its debt. In their last annual report they actually addressed this issue. They are currently attempting to lower their debt. As we see below in Figure 33, it is slightly above the market median and ranks in the upper 60%. This strengthens my forecast of a beta above 1.

Debt to Equity S&P 500 BDX UN Equity RankMedian 52.58 78.59 61.5%90 Precentile 258.49 10th Percentile -

Historical Beta

Figure 34 was developed with information dating back to the mid-1980s. As stated earlier we can see that when the company started up they had a high beta but we can see that with time it became much lower and much more stable. According to this graph, the beta has been volatile but seems to still be slowly rising since 2014. This does in fact help my forecast of a slightly increased beta compared to the current 1.2 beta given to the stock.

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Figure 34

Beta Forecast.

Now assuming that the beta has been rising but that the gross and net margins are both very stable and that the company is currently working towards lowering its debt, I have forecasted 3 beta values for different scenarios;

Best Case scenario: 1.20 Base scenario: 1.30

Worst case scenario: 1.45

Discount rate Calculations

Using the Capital Asset Pricing Model I have calculated the discount rate (Figure 35) based on three different scenarios, the base, the best case scenario, and worst case scenario.

BestCase

Base Worst Case

Rf 3.5% 3.5% 3.5%MRP 3.65% 3.65% 3.65%Beta 1.2 1.3 1.45

Discount Rate

7.88% 8.25% 8.79%

Figure 32

Figure 33

Figure 35

Final thoughts

I believe that all 3 assumptions are reasonable and very much possible for the future. I am surprised that beta is not higher. Due to previous research done on BDX I initially believed beta would be higher at least ranging from 1.5-1.75. It is great to see that the beta is in fact not within that range and is a safer investment than originally believed.

Firm Valuation

There are multiple models to assess the firm value. For purpose of this analysis we will be valuing the BDX stock value based on 3 different models:

Dividend Discount Model/ Gordon Growth Model

Capitalized Earnings Model H Model

Before being able to use any of the above models, I will have to calculate some inputs for these models. Most significantly the short term and long term growth rates.

To determine the growth rates, I will be using historical data, along with the industry and company analysis. Since the medical equipment and device industry is constantly changing and will be experiencing much change in the upcoming years, due to the baby boomers, most of my growth rates will be based off of overall economic conditions along with industry conditions.

Long term Growth Rate

Previously I calculated my nominal GDP (5%) which I believe is a good estimation of long term growth. My nominal GDP was a forecast as well and will serve as my base assumption. I will do a best case scenario and a worst case scenario as well. If the economy were to slow down and the industry began to fall we can forecast the worst case long term grow to be about 4.0%. I calculated a low worst case scenario due to the fact that this is a cyclical stock meaning that it does fall in a recession

environment. Our best case scenario in a robust economy would be 6%.

Best Case: GLT = 6.0% Base Case: GLT = 5.0% Worst Case: GLT = 4.0%

Short term Growth Rate

Determining the short term growth rate is going to be fairly tougher than usual. In the industry analysis I came to the conclusion that I believe that this industry will outperform the market as far growth is concerned due to the upcoming baby boomers mentioned earlier. Through previous research I believe. That combined with acquisitions, which are extremely common in this industry, lead me to believe that short term growth will be higher than in the past.

Earlier I was able to forecast ATO * Margin which is a key to growth. For the upcoming year of 2016 I forecasted ATO* margin at 9.8%.

In order to get a better estimation on short term growth rate, I will look at 3 different growth methods of calculation to forecast a best case, worst case and base case scenario.

1) The first short term growth calculation approach I would like to look at is the PEG ratio approach which is calculated by:

PE ratio/PEG ratio= Expected Short-term growth

15.91/1.38=11.53%

As we can see using the PEG ratio approach we get a high growth rate over 11%.

2) Another approach for the calculation of short term growth rate is the sustainable growth method. This method calculates how much the company can grow without borrowing additional funds. This rate is calculated with the following formula:

ROE*Retention=short term growth rate

We calculated previously our forecasted ROE for BDX at a mere 16.8%. In order to complete the calculation we have to calculate retention which is calculated below (the EPS will come from our forecasted values).

1-(2.38/6.25)=.62

Now we can calculate the short term growth rate:

16.8%*.62=10.4%

3) The last approach I will take a look at in order to calculate my short term growth rate will be Historical Growth approach. I will be calculating growth on a 3 year rolling period, 5 year rolling, and 10 year rolling period from quarterly data from the trailing 12 month EPS. As you can see in graph Figure 36, EPS growth has been very volatile and seems to be a lot lower than it has been in history but is doing a lot better than in bad years. As you can see it is increasing

since 2013, but compared to its other peaks in history it is much lower. According to the data EPS forecast growth would be around 8%.

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Figure 36

After looking at these different approaches and taking into account other findings such as ATO *Margin, I have come to my conclusion on short term growth rate. I am predicting a worst case scenario of 6.5% (if Becton Dickinson is unsuccessful in innovative products) and a best case scenario of 12%. My base case scenario will be that of 9%. I have adjusted my base scenario despite of the high predicted short term growth rates shown by my models above, due to increased buyer power as well as increased rivalry which I predict will continue to effect gross margin and growth ability as shown earlier in my forecast report.

Best Case: GST = 12% Base Case: GST = 9% Worst Case: GST = 6.5%

Dividend Discount Model (Figure 37)

This model is also known as the Gordon Growth Model. This is the one of the most commonly used models. This is an approach of using the perpetual annuity equation to value a stock. This method is calculated with the following formula:

Value = (Div1*(1+LT Growth))/(Ke-LT Growth)

Dividend 1 (ttm): There is no calculation needed in order to get the dividend 0. We simply have to get the current dividend per share which is $2.40.

I will be using the Ke values forecasted earlier in my report.

BestCase

Base Worst Case

Div 1 $2.40 $2.40 $2.40LT Growth 6.0% 5.0% 4.0%

Ke 7.88% 8.25% 8.79%

Value $120 $70.15 $48.10

Capitalized Earnings Model (Figure 38)

This is a model presented to myself by Professor Sweet as an undergrad. This method takes into account the value of the firm as is. This means that there is no more capacity growth for the firm and that the firm will enter no new markets. This model also assumes the firm won’t grow, but sustain current capacity, meaning the firm will payout 100% of their earnings.

Value = (EPS1*(1+inflation))/(Ke-inflation)

Earnings per share (ttm): just as Dividend 1, there is no calculation

needed to obtain current earnings per share. According to Bloomberg EPS for Becton Dickinson is currently at $3.35.

Inflation Assumption: To be consistent we are going to keep inflation assumption as 2.5% as we did earlier in our discount rate calculation and nominal GDP calculation.

BestCase

Base Worst Case

EPS1 $3.35 $3.35 $3.35Inflation 2.5% 2.5% 2.5%

Ke 7.88% 8.25% 8.79%

Value $63.82 $59.72 $54.59

H Model (Figure 39)

This is the most uncommon model from all 3. It is also one of the most involved formulas of them all. In order to continue with the H model we have to predict H, which is the time that we believe it will take for the company to move from short term rate to long term rate.

I believe that it may take the company many years to get from short term growth to long term growth due to the current demand situation and changes of amount of people in different age demographics. Not only that but acquisitions are certain in the near future due to incoming small competitors attempting to gain market share based on new products. They are slowly but surely growing. For that reason I think it will take them 20 years to get from short term to long term growth. This means that I will have an H of:

Figure 37

Figure 38

H=20/2=10

The formula for the H model is as follows:

Value= (Div1*(1+LT growth)+Div1*H*(ST-LT))/(Ke-LT)

BestCase

Base Worst Case

Div 1 $2.40 $2.40 $2.40

LT Growth 6.0% 5.0% 4.0%

ST growth 12% 9% 6.50%

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Ke 7.88% 8.25% 8.79%

Value $211.91 $107.08 $64.63

Recommendations

The models I have used have generated a particularly wide value of potential stock prices, I do feel that most of the variances could be attributed to the current down fall in margins within not only BDX but the industry as a whole all attributed to buyer power increase as well as increase in rivalry. Nevertheless based on my assumptions for the forecasted growth rates and beta, I am confident in this range and can assess a fair recommendation.

If you see Figure 40, you can see all different values and I have averaged the models in order to see a more accurate valuation. Currently BDX ‘s stock price is at $148.68 (as of November 14, 2015) My best case assumption estimates a price of $144.68. with a downside of -3%, while my worst case scenario estimates a price of $57.86 with a downside of -61.08%.

Current = $148.68 Best Base Worst

Dividend Discount Model $120 $70.15 $48.10

Cap Earnings Model $63.82 $59.72 $54.59H model $211.91 $107.0

8$64.63

Average price $175.91 $94.44 $60.64Upside/base/downside 18.31% -36.48% -59.21%

As you can see in Figure 40 all 3 different models produces very different valuations. I believe that H takes many more variables into account so for this very reason the H model valuation will compose 70% of the averaged price. The other 30% will be composed of the other two models. This would mean that BDX is currently overvalued.

I was not surprised to find that the stock is overvalued due to all the previous research. What I was surprised to find was that it is 36.48% overvalued currently. Due to this I would strongly recommend to sell.

Comparison Analysis

We can compare the price of BDX relative to their peers by comparing them to both

Figure 39

Figure 40

the market and their specific industry as a whole. This can help us see whether they are fairly price, overvalued, or potentially undervalued. For this comparison analysis, I will use the S&P 500 index as a measurement of the overall market, and the S&P North American Health Care Equipment (S5HCEP)

I will be using four different ratios in order to determine if BDX is either over, fairly or under valued relative to both the market as a whole as well as their respective industry. My four ratios will consist of: Price to Earnings (P/E), EV to Sales (EV/S), Price to Book (P/B), and Price to Cash Flows (P/CF).

Price to Earnings (P/E) valuation

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BDX PE ratio slightly above market but falling

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Figure 41

When looking at BDX’s PE ratio (Figure 41) we can see that there seems to be no real stability and is actually quite volatile. In 2008 we can see that the company took a huge hit through the recession and has been slowly rising. At about mid 2014 we see the PE ratio finally reach levels equal to those prior to the recession. Even at that they exceed the prior high.

When compared to the market in 2003 we can see that BDX’s PE ratio was below that of the overall market and rose past it in 2004 and continued this way up until the market crash and recession in 2008. After 2008, the PE ratio for BDX once again fell below the overall market and followed it very closely up until 2013. Since 2013 BDX has followed a similar trend to that of the market but it well above the market PE ratio. The higher PE ratio relative to the market leads me to believe that BDX is overvalued.

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BDX PE ratio recently falls below industy PE ratio

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Figure 42

To get a better view of BDX we can compare it’s PE ratio to those in the S5HCEP Index. We can see in Figure 42 that in 2006, BDX achieved a higher PE ratio than compared to that of their industry, and was able to maintain this even through the recession up until 2012. Since then it appears that BDX has gotten close to reaching the PE ratio of their industry but has not been able to match or surpass it. This signifies that BDX is currently fairly valued when compared to their industry.

EV to Sales (EV/S) valuation

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Figure 43

Ev to sales is a good indicator of profitability which is a good measure to use when comparing firms. This metric is quit tricky. A lower ratio is usually more attractive than a lower one because it indicates that a company has high sales relative to its value but this is not always true. Ev to sales also gives insight into the forecasted sales of a company. A lower EV to sales can signal a lower forecasting of sales versus a high Ev to sales value which could indicate higher sales forecast.

As we can see in Figure 43, in the year 2004, EV to sales for BDX rose above that of the overall market. They have maintained this position in EV to Sales over the years and had a dramatic increase in 2014.This increase can be due to the noise of a current proposition of a major acquisition. This could have spiked an increase in forecasted sales thus spiking EV to Sales as seen above. This leads me to believe that BDX is overvalued compared to the market as a whole.

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Figure 44

When comparing BDX’s EV to Sales and the medical equipment industry as a whole (Figure 44) we can see that BDX is above that of the industry in the EV to Sales ratio. They follow a trend very similar to that of the industry but just at much higher ratios. This could indicate that their sales are not as high as competitors relative to corresponding enterprise value. This could also indicate higher forecasted growths and be a good thing relative to the industry. More research would need to be conducted on competitors to see, what is the true cause of this consistently higher EV to Sales valuation of BDX relative to the industry. Whatever the cause may be our analysis signals that BDX is currently overvalued relative to its industry.

Price to Book (P/B) valuation

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Price to book is a great indicator of whether a company is undervalued or overvalued. This metric compares a stock’s market value to its book value. A low P/B ratio could signify major concerns of the company’s fundamentals. This also is an indicator of what would be left if the company where to bankrupt immediately.

When compared to the market as whole (Figure 45) we can see that BDX has a high P/B ratio. This means that its stock market value is high relative to its book value. While it is higher than the market we also see that it has fallen recently. Our graph signals that BDX is currently overvalued relative to the market as whole.

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Figure 46

When comparing the P/B ratio of BDX relative to competitors within its industry (Figure 46) we see that it follows the same trend as seen in the overall market of being above other companies. We do see though that gap between them both is much smaller within the industry. While the market as a whole analysis showed signs of a significantly higher P/B ratio, we see that it is not significantly higher when compared to the industry. In fact, we see that recently in 2015 BDX ratio is almost in line with that of the industry and only very slightly above. This analysis yields the same reports as the market analysis showing signs that BDX is overvalued but pretty close to the industry recently so I will consider it fairly valued.

Price to Cash Flows (P/CF) valuation

The last ratio I will use to compare valuation of BDX to both the market as a whole and to their industry in specific will be the Price to Cash Flows ratio. A single digit and low valuation from this ratio can indicate that a stock is undervalued.

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Figure 47

Relative to the market as a whole BDX seems to be far ahead in the P to CF ratio. The market seems to be really low since the market crash in 2008 and slightly improved over the years. As you can see in Figure 47 there seems to be a fall recently in 2015, but BDX seems to have experienced a similar fall. With the graph above I have come to the conclusion that relative to the market as a whole BDX is overvalued.

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Figure 48

To get a better perspective on BDX’s Price to Cash Flow valuation we will compare it to those within its industry (Figure 48) As we can see BDX is in line with their competitors. This means that their competitors are overvalued compared to the market as a whole as well. At some points we see in Figure 48 that BDX falls

below their competitors while other times it surpasses them. After careful consideration I believe that according to the Price to CF ratio, BDX is fairly valued relative to its industry.

Relative ValueMarket Industry

P/E Over Valued Fair ValuedEV/S Over Valued OvervaluedP/B Over Valued Fair valuedP/CF Over Valued Fair valued

Figure 49 summarizes the metrics throughout this valuation relative to both the industry (S&P500) and their corresponding market S5HCEP. After evaluating multiple metrics I have determined that tends to be more often over valued then fair valued, and I did not receive any results to support that BDX is undervalued. As we can see BDX is fairly valued relative to its industry except in the EV to Sales ratio. So that signifies that the industry as a whole for the most part is overvalued when compared to the market as whole.

Regression Model

After multiple trial and errors I used the best model that I could generate and used it to valuate BDX relative to it’s industry. I started with both industry and sub industry and kept getting off the chart numbers so after much deliberation I decided to take BDX’s main competitors as listed in the

Figure 49

S5HECP Index for a more accurate valuation purpose.

For my regression (Figure 50) I used EV/IC as my dependent variable, my independent variables consisted of Beta as my risk measure, and ROIC as a fundamental variable and lastly I used Long term Growth EPS for growth purposes on the regression model. Through these variables I was able to achieve a R Squared of 89.34% meaning that these variables explain that percentage of EV/IC.

From this regression model we can now draw a scatter plot identifying the value of BDX relative to its peers (Figure 51). In this graph we can see that BDX appears to be rich within its industry but is fairly close to the trend line, but still above it. This means that BDX is overvalued compared to competitors but since they are so near the trend line we will assume that they are fairly valued as indicated by all other comparisons earlier.

SUMMARY OUTPUT EV/IC

Regression StatisticsMultiple R 0.945219013R Square 0.893438982Adjusted R Square 0.847769974Standard Error 0.571547014Observations 11

ANOVAdf SS MS F Significance F

Regression 3 19.17204747 6.39068249 19.56335435 0.000880656Residual 7 2.286661921 0.326665989Total 10 21.45870939

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -3.987874391 1.297943504 -3.072456065 0.018005234 -7.057023078 -0.918725704 -7.057023078 -0.918725704EQY_RAW_BETA -0.031276071 0.981837826 -0.031854621 0.975477226 -2.352953607 2.290401464 -2.352953607 2.290401464Return on Invested Capital 0.092815709 0.043276356 2.144720967 0.069150568 -0.009516613 0.195148031 -0.009516613 0.195148031BEst LTG EPS:D-1 0.517757757 0.091993975 5.628170299 0.00079229 0.300226573 0.73528894 0.300226573 0.73528894

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Figure 51

Target PE ratio

To calculate my target PE ratio I will use the following formula:

P/E= Payout / (ke-g)

My pay out base ratio will be set at 40%, because this is the average payout of stocks. Our worst case scenario is going to be 30% assuming that the company reinvests a majority of funds. The best case scenario will be set at 45%, since I believe that it will not be much higher than average because they will reinvest a large portion to fund the R&D department which we identified as a large investment earlier in our research.

All additional information has been forecasted and calculated earlier so we will continue to use those for our calculation. Below in Figure 52 we can see all of our results for Target PE ratio and Target Price.

Figure 50

Worst Base Best

Payout 30% 40% 45%

KE 7.88% 8.25% 8.79%

Growth 4.0% 5.0% 6.0%

Target PE 7.89 12.31 16.13

EPS 3.35 3.35 3.35

Target Price $26.43 $41.24 $54.04

Discounted price today

The discounted price today that I have calculated Becton Dickinson to be at is about $92.54 for best case, $57.45 base case, and $41.84 for worst case. This was computed using a discounted cash flow with the growth rates listed above in chart 60 and previous betas calculated earlier. Currently on December 4, 2015 BDX is trading at $149.93 USD.

Conclusion

As we can see much of our analysis points to BDX being overvalued when compared to the whole market. When compared to their industry they seem to be fair valued in both the regression analysis and ratio comparisons. Both our target price and our discounted price are low compared to what BDX is currently trading for strengthening my conclusion of the stock being overvalued.

After taking into consideration all aspects of valuation completed, I believe that Becton Dickinson is overvalued. Their discounted

target price is unattractive. I believe that while BDX is overvalued I believe that the entire industry of medical equipment is overvalued compared to the market. Within their industry they do have strong cash flows and fair ratios making it a fair investment, but I will still recommend a sale of the stock.

Figure 52

Technical Analysis

The last analysis I will complete on the stock will be that of a technical analysis. This is a security analysis method to help forecast the direction of prices through the study of past market data, usually mainly price and volume to identify patterns.

We will take a look at three different models including the moving average models, the RSI and the Ichimoku chart model.

Moving Average Analysis (Figure 53)

The moving average model is the most commonly used model. We will be using the 50,100 and 200 day MAs. The theory behind this model is that a stock is a good buy when the stock is above all three historical MAs. If the stock ever falls below then it raises concern and one should sell the stock according to technical analyst.

Above is the SMA graph for Becton Dickinson (Figure 53). The 50 SMA seems to be very volatile, especially in the current month of November. August raised some major concerns as you can see that the stock fell well below all three averages, which would signify a very strong sell. In September we see the stock begin to rise again and slowly begin to beat each of the SMAs again. As of November, the stock seems to be well above the markers and does not seem to have any sign of downfall, which would imply a buy recommendation according to this technical analysis model.

Figure 53

RSI Analysis (Figure 54)

Another popular technical analysis model used is the Strength Index (RSI) developed by J. Welles Wilder. This is a momentum oscillator that measures the momentum of price changes. The RSI oscillates between zero and 100. In this theory the RSI is considered overbought when above 70 and oversold when below 30.

As we can see in Figure 54, BDX is currently at 63.38 as of December 8, 2015. As we can see BDX has not only been extremely close to the red marker within their last fiscal year 2015, but actually surpassed the 70 benchmark from July 29, 2015 up until August 6, 2015. Then at the end of August we see it fall under the 30 bench mark as well. As we progress the year everything seems fairly fine up until the very beginning of November. Once again we see our RSI surpass the 70 benchmark signaling it has been overbought. While it does fall back below 70, it is still significantly high which means it might be a good time to sell very soon.

Ichimoku Cloud Analysis (Figure 55)

The last technical analysis method I want to cover is known as the Ichimoku. It looks complex at first, but the method was designed by Goichi Hosoda, who uses five elements that are used together to develop a broader picture that can help identify trends and signals to better invest in the market. The element are as follows:

o Tenkan Sen – The moving average of the highest peak and lowest point over the last 9 trading days. (conversion line/ purple trend line)

o Kijun Sen – This moving average is the same as the Tenkan Sen but over 26 trading days instead of 9 trading days. This is usually used in combination with the Tenkan Sen to suggest probabilities of future momentum. (Base Line/ Yellow trend line)

o Senkou Span A – This is the average of the Tenkan Sen and Kijun Sen, plotted 26 days ahead.

o Senkou Span B – This is the average of the highest high and lowest low over the last 52 days, plotted 26 days ahead.

Figure 54

o Chikou Span – This is the closing price plotted 26 days behind. This element is usually used as a confirmation of trends and momentum and provide support and resistance levels highlighted by the other elements. (Lagging line/ Gray trend line)

Figure 55

As we can see in Figure 55 the Price line was moving through the cloud at about mid October and is now above the cloud signaling a bullish trend. As we can see the price line is also slightly above the base line also showing trends of a weak bullish trend.

Furthermore the Tenkan (conversion) line has recently reached and seems to surpass the Kijun (base) line from below which signals a bullish trend as well. Contrary to what the RSI signaled, this model is signaling that there is currently a bullish market trend and that an investor should by the stock. If we see any downturn or sign of bearish market we should sell immediately.

Technical Analysis Conclusion

After completing all three models I found that each model contradicted one another. Some show trends that suggest to buy while others signal the opposite suggesting a sell. The most difficult of the three to understand in my opinion was the Ichimoku Chart as there are many variables and they can contradict themselves in a sense at times, but overall I think it is a great model in itself as well. After looking at different models of technical analysis based on these models solely, I would suggest for an investor to hold the security but due to previous research, I still believe the best option is to sell the security.