Becton Dickinson's (BDX) third-quarter results beat our estimates on solid revenue growth and expense management. Declines in selling, general and administrative expense added 170 basis points (bps) to its operating margin, offset by a higher cost of good sold gross margin (60 bps).
For 2008, the management now expects gross margin of 51.2 percent, about 60 bps below the 2007 level. We are increasing our 2008 revenue estimates on the management's updated outlook, and our EPS estimates also increase on greater revenue but with lower operating margin improvement.
Absent acquired growth and FX [foreign currency exchange] benefit, organic revenue growth remains in the 7.0-8.0% area. Acquisitions and other uses of cash, including stock buybacks, will be needed to drive sustainable low double-digit or low teens EPS growth. Nonetheless, the company's diversified and consistent performance is deserving of a premium, in our opinion.
At the current price, shares of Becton Dickinson trade at 19.4x our fiscal year 2008 estimate of $4.45, a P/E premium to the average 17.7x 2008 multiple of medical supply peers and roughly a 6% discount to the group average 1.6x 2008 P/E/G.
We are comfortable with this name trading at a premium to the group and are raising our valuation to a 1.8x 2008 P/E/G. This brings our target price to $98.50, an approximate 25% group P/E premium, equivalent to 22x our 2008 EPS estimate.
Read the full analyst report on BDX
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