Over the past six months, BD’s stock price fell to $181.01. Shareholders have lost 12.6% of their capital, which is disappointing considering the S&P 500 has climbed by 23.8%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in BD, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is BD Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why BDX doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, BD’s sales grew at a mediocre 5.5% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, BD’s margin dropped by 10.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. BD’s free cash flow margin for the trailing 12 months was 11.9%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
BD historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.5%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.
Final Judgment
BD isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 12.6× forward P/E (or $181.01 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a top digital advertising platform riding the creator economy.
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