25 Aug 2005 Medical Equipment company CR Bard has many appealing characteristics. Over the last couple of weeks, the Reuters Select Top Down article series looked at companies in different market capitalization ranges. We started with a look at Small- & Micro-Cap companies. Then, we moved to MidCap names. This week, we focus on LargeCap players. Earlier this week, we discussed Johnson & Johnson (JNJ), a giant in the pharmaceutical field. Today, we take a look at another Healthcare company with a relatively rich history. Medical Equipment & Supplies company CR Bard Inc (BCR) scored on Reuters Select stock screens in three areas: Value, Quality, and Sentiment. In the Value arena, BCR landed on the Contrarian Opportunities screen. In the Quality category, we found BCR on the screen for Strong Operating Margins. And, in the Sentiment arena, BCR registered on the screen for Consensus Choices. Financial Highlights
BCR's rate of revenue growth has accelerated in the trailing twelve-month (TTM) period from its five-year average; yet, it was not able to catch up with the Industry's rate of improvement. Nonetheless, the increase in the company's EPS growth rate of late puts it considerably ahead of its peers. While profit margins have increased across the overall Industry, BCR has managed more substantial improvement, improving upon its relative advantage. Over the last five years, the company's dividend growth rate has been only a portion of the Industry's clip, yet BCR still allocates a larger percentage of its net income to investors in the form of dividends. Its current dividend yield is comparable with the Industry mean.
Regarding its valuation, BCR, by most counts, is trading at a steep discount to the Industry. Its price to earnings (P/E), P/Sales, P/Book Value, and P/Cash Flow are all well below the Industry norm. One metric, P/Free Cash Flow (which omits non-operating cash outlays, capital spending and dividends), is considerably above the peer mean. The company's PEG (forward P/E relative to long-term EPS growth rate) ratios are a bit high for the real die-hard types, but are still within range for a Value play.
Another Healthcare Play
In the JNJ article, I mentioned a little bit about the history of the company, and how it stretched back 120 years or so. BCR's history goes back about 100 years, and its story is just as interesting. Consider, for a moment, that it was started in 1907 by Charles Russell Bard, who began importing products for treating relieve urinary discomfort. In 1923, CR Bard was incorporated, and, in 1934, it began marketing the Foley catheter. Since then, it has grown to significantly.
The company started out marketing urinary products, like urethral catheters, and this remains a large part of the company's business today. Approximately 30% of BCR's business consists of urology products, while vascular and oncology each account for about 25%. Surgery products, such as meshes for hernias and irrigation products for orthopedic and gynecological procedures, make up roughly 20% of the company's business, and the balance is in other product lines.
As with JNJ, BCR uses strategic acquisitions to grow its business. For instance, in 2004 BCR acquired assets of ONUX Medical, including its Salute fixation system for hernia and soft-tissue repair; Bridger Biomed, and this deal included its anti-adhesion barrier technology for hernia mesh products; and the RespiShield suction catheter product line from Sorenson Medical. So far this year, it has picked up certain assets of GENYX Medical, Inc., including some products for treating female incontinence.
How About That Demand? Over the last five years, the company's revenue growth rate averaged an annual clip of 9.83%, much slower than the Industry norm of 15.90%. Of late, business conditions have improved and the Industry's overall revenue climbed 17.45% in the TTM span. By comparison, BCR's TTM revenue stands 10.88% above its year earlier level. The company's recent performance stemmed from several factors, including solid growth in foreign markets. Further, demand has been quite strong for products BCR's Oncology segment. The company's specialty access catheters have been among the key drivers here, as select products, such as its dialysis access products, have been particularly well received in the market. BCR has some other products in pipeline, which, pending successful clearance of all the necessary hurdles, should help to drive revenues down the road. Think of BCR's roots in the urology arena. Granted, growth here hasn't been as fast as it has been in the Oncology division, but it is still pretty solid, thanks partly to solid demand for its basic urinary drainage catheters. The big story here, though, is sales for the company's incontinence products, which have been bolstered by demand for BCR's surgical incontinence devices. Next, let's take a moment to think about BCR's Vascular business. Although overall segment revenues climbed at a high single-digit pace, specific areas, like its vascular graft business, were quite soft. Nonetheless, select catheters remained in strong demand and buoyed revenues. Finally, let's look at the company's Surgical business. Revenue in this arena has been climbing, thanks largely to growth in the company's hernia repair and mesh product. Amid the slight increase in the company's revenue growth rate, its EPS growth rate has accelerated significantly and is currently faster than the Industry's relatively subdued pace. More specifically, over the last five years, the company's EPS climbed at an average annual rate of 19.94%, slower than the Industry norm of 23.28%. In the TTM time frame, though, the Industry's pace of improvement decelerated to 14.91%, while BCR's rate skyrocketed to 64.69%. On The Margin Given the revenue and EPS growth rates for both BCR and its peers, there is little surprise in finding out that the company's profit margins have widened substantially, while the Industry's have shown only slight improvement. Over the last five years, the company's Operating Profit Margin averaged 17.70%, slightly better than the Industry mean of 17.01%. Whereas the peer average widened to 17.96% in the TTM span, BCR's Operating Margin improved to 27.02%. At the Net Profit Margin level, the Industry mean improved from its long-term figure of 11.18% to 12.14%. By comparison, BCR's Net Margin improved from a slightly-Industry-leading figure of 12.81% to a substantially-Industry-leading figure of 19.68%. Several factors help to explain BCR's enhanced profit margins. One of these is cost efficiencies. Tight control of R&D and other expenses also contributed. A shift in product mix toward increased volume sales of higher margin products tacked on a bit, as well. One part of the recent margin improvement that we can not really count on going forward, though, is the foreign exchange translation. Foreign currency issues provided a nice boost, but I'm not about to start counting on the currency markets to continue contributing to performance. Instead, I'd rather focus on the company's products and its operational-efficiency initiatives.
The analysts who cover BCR expect the company to post further revenue and EPS gains this year and next. It is also worth noting that the consensus estimates are higher now than they were just two months ago. And, it is also worth noting that BCR has a recent history of beating estimates. So, even though analysts may be raising their estimates, they may still be aiming too low. I'm not saying that the company is going to beat estimates again, but it has done so over the last several quarters.
Based on the consensus analyst estimates for this year and next, BCR is currently priced at forward P/E ratios of 21.89 and 19.14, respectively. Further, a handful of analysts also provide Reuters with estimates regarding the company's long-term EPS growth rate. On average, they look for an average annual clip of 15.42%. Based on these numbers, BCR has PEG ratios of about 1.42 and 1.24 for 2005 and 2006, respectively.
When it comes to PEG ratios, lower numbers indicate better values. Although parity is the traditional threshold for more-conservative Value plays, numbers slightly above this benchmark are still within Value territory. That said, we see that BCR's valuation is still reasonable for many investors. Also, keep in mind that BCR came to light on stock screens in multiple categories, suggesting that it has relatively broad-ranging appeal. Overall, many Value-, Quality-, and Sentiment-oriented investors seeking exposure to the Medical Equipment industry will likely find BCR's current price an attractive entry point.
As always, remember that each stock is not equally well suited for every investor, and individuals need to carefully consider their own preferences when contemplating any investment decision.