Need Defense? Think Medical Supplies
Diversification won't be easy, because competitors in diagnostics and biosciences such as Abbott (ABT) and Roche have "greater marketing reach and larger R&D budgets," Morozov warns.
However, Becton Dickinson's "reputation for searching out pockets of growth, along with its sizable manufacturing and distribution infrastructure, convinces us that
Buy and Build
Bard also will need some bolt-on deals to help propel sales and profits, says Kristen Stewart of Credit Suisse. In the last two years, Bard has bought businesses that make non-heart stents, a device that prevents catheters and intravenous tubes from falling out of a patient's body, and safety needles and syringes.
Stewart told clients in a March 10 report that Bard will probably make more small acquisitions. "Given the current conditions in the credit and equity markets, as well as the regulatory and reimbursement environment, we believe larger med-tech companies may be able to acquire smaller companies at reasonable valuations."Stewart, who has a neutral rating, says the current stock price more than reflects Bard's growth rate prospects. She doesn't own shares, but her firm is a market maker. She and other analysts say Bard has become a star thanks to a big deal that didn't happen. The voracious conglomerate Tyco International (TYC) bid for Bard in May 2001, but the deal fell through in February 2002. After the deal unraveled, Bard restructured, developed new products and accelerated sales and profit growth. "The company initially fell into its standard pattern" of 6% to 8% sales growth, says Matthew Dodds of Citigroup Global Markets, in a March report to clients. The emergence of new products pushed the sales growth rate past 10% and the earnings-per-share rate over 15% for several years, says Dodds, who has a buy rating. Another surge of new products, starting two years ago, should keep Bard in "double-digit sales and mid-teens EPS growth through 2010," says Dodds, who doesn't own shares. His firm has had a non-investment-banking relationship. Bard is "one of the safest, most diversified companies in med-tech," says Dodds. Analysts say Bard must beware of Covidien (COV), which was spun off in mid-2007 from Tyco. Covidien represents Tyco's spending spree for medical-device, drug, radiation and surgical-products companies. With a market cap of about $23 billion, Covidien is a major force in medical devices, which account for nearly 70% of sales from continuing operations. However, it may take two years for Covidien to really get rolling, because it must undo the damage caused by Tyco. Tyco, analysts say, paid inadequate attention to its health care properties, starving them for financial support and treating them merely as cash generators. "Covidien's near-term profitability will be negatively impacted by growing marketing and R&D costs," Morozov told subscribers in February. Covidien also was saddled with $144 million in unresolved tax liabilities "and a long list of outstanding legal proceedings," he says. Morozov gives Covidien a four-star rating, because "we view these as temporary hurdles." Since its spinoff, Covidien has sold, or announced plans to sell, three businesses and has bought two small device-makers. Analysts expect more wheeling and dealing. "Covidien is on the right track pruning noncore businesses and building on its core medical technology franchises," says Joanne Wuensch of BMO Capital Markets, in a March 12 note to clients. Wuensch, who doesn't own shares, has a market perform rating. Between July 2, 2007, the first formal trading day on the NYSE, and April 2, 2008, Covidien's stock was up 5%.
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