Morning Note: Market News and an Update from Becton Dickinson.

Market News

US equities recovered some of their recent lost ground last night – S&P 500 (+1.2%); Nasdaq (+1.2%) – as the market awaits inflation data due this week which may provide a clue on the size of the Federal Reserve’s coming interest rate cut. 10-year Treasury yields stand at 3.71%. The dollar held on to its gains, while gold ticked up to $2,505 an ounce. AngloGold Ashanti has made a recommended $2.5bn bid for rival gold producer Centamin at a 37% premium to last night’s close.

Alphabet (Google’s latest anti-trust trial began) and Apple (rolled out the iPhone 16 and set the stage for a new AI platform) lagged. The banking sector rose following news that the largest US banks are now facing a 9% increase in capital requirements, a dramatic reduction from an earlier 19% proposal for Basel III from regulators.

In Asia this morning, markets were mixed: Nikkei 225 (-0.2%); Hang Seng (+0.3%); Shanghai Composite (+0.3%). The yen held steady around 143 to the dollar.

The FTSE 100 is currently trading 0.5% lower at 8,222. AstraZeneca has been marked down by 5% following news that its experimental drug Dato-DXd does not significantly improve overall survival in lung cancer patients in a late-stage trial.

UK average weekly earnings rose by 4.0% year on year in July. The UK may include more than £20bn of tax hikes in the upcoming budget without breaking election pledges by targeting inheritances and capital gains, according to the Resolution Foundation. Sterling trades at $1.3088 and €1.1854.

Brent Crude drifted back to $71.50 a barrel. The Biden administration purchased more than 3.4 million barrels of crude for the Strategic Petroleum Reserve, the Energy Department.

Source: Bloomberg

Company Update

Last week, Becton Dickinson hosted a fireside chat at which it provided an encouraging update on the business. The company remains confident it will generate mid-single digit revenue growth, driven by innovation, and meet its FY2025 margin target. The shares have been subdued over the medium term and currently trade on only 17x FY2025 forecast earnings, a level we believe fails to discount the positive outlook.

Becton Dickinson (BD) is a leading global supplier of medical devices and instrument systems. The group’s products help achieve better healthcare outcomes, mitigate healthcare cost pressures, and improve healthcare safety. 90% of revenue comes from products where the group is the market leader, with 85% from recurring or non-capital related purchases. As a result, the company is well placed to benefit from increased demand for healthcare from an ageing population and in emerging markets. In the near term, revenue growth will be, in part, dependent on improving patient admissions and surgical volumes and a stable capital investment environment.

The BD 2025 Strategy is targetting sustainable mid-single-digit revenue growth (i.e., 5.5%+), margin expansion of 540bps (to 25%), and double-digit earnings and free cash flow growth. The group is actively managing its portfolio – the diabetes care unit has been spun off and the surgical instrumentation platform sold. In addition, the group is exiting lower margin products and markets – the number of stock lines has been cut by 20%, achieving the 2025 target a year early, with a further reduction expected. The result is a more simplified portfolio and increased efficiency able to drive improved operating leverage. The focus is now on operational simplification via a 20% reduction in manufacturing plants.

Becton continues to shift toward faster growth markets via the launch of innovative new products and through acquisitions. Last week, the group completed the $4.2bn acquisition of the Critical Care unit of Edwards Lifesciences, funded with $1bn of cash and $3.2bn of new debt. The business is a high-growth, innovative industry leader in advanced patient monitoring with AI algorithms serving millions of patients globally. The company invented the hemodynamic monitoring category, and its solutions are currently used in more than 10,000 hospitals globally to better understand the cardiovascular condition in real-time for critically ill patients to help improve outcomes. The acquired business will operate as a separate unit within BD’s Medical division. It has grown by 7% p.a. over the last five years, with 80% of revenue recurring. An adjusted operating margin of 25% is expected to increase over time. Overall, the market has greeted the deal positively given it is in line with the group’s strategy and represents an attractive addition to its stable of innovative products.

The group’s Life Sciences division accounts for around 25% of sales. In light of the level at which similar independent businesses are being valued on the stock market, the group disclosed it would consider a sale or demerger if it generated shareholder value.

The macro environment in China remains a challenge, stemming from value-based pricing as government buyers look to control costs, a slowdown in biotech research spending, and a clampdown on corruption. However, the group believes China remains a large attractive market with a significant unmet need.

The company made some positive noises on pricing. Before the pandemic, the group had to endure flat to marginally negative pricing. The goal is now to generate price growth of 1%-2% p.a. as product innovation more than makes up for deflation in China.

Following the Critical Care acquisition highlighted above, Becton’s financial leverage has risen to 3x net debt to EBITDA. The aim is to de-lever back down to its 2.5x long-term target within 12 to 18 months. As a result, free cash flow will mainly be used for debt repayment. However, it will also be directed to internal growth opportunities, bolt-on M&A, and shareholder returns. The group currently spends around 6% of revenue on R&D, with 60% directed towards what the company calls transformative solutions. The group has launched more than 50 key new products in the past two years and is on track to launch 100 products through to 2025, generating incremental revenue of $1.7bn. In particular, the company notes that the GLP1 market is a $1bn opportunity as its devices are used for the delivery of weight-loss drugs.

The company also highlighted ongoing progress with its Alaris Infusion System, a product that received FDA clearance to resume sales following a software upgrade. The group has rolled out an updated and enhanced market-leading system that can safely deliver medications, fluids, and blood products to support patient care. The ramp-up of the product has been faster than planned, with an all-time record number of pumps manufactured and shipped. BD Alaris has achieved its historical quarterly run rate of $100m earlier than expected and sees strong momentum going in FY2025.

As a reminder, for the financial year to September 2024, the group is guiding to:

-          organic revenue growth of 5.0%-5.25%, with the current quarter expected to grow by 6.5%-7.0%.

-          operating margin up by more than 50 basis points versus the 23.5% in FY2023. In the current quarter, margins are expected to expand sequentially by 150 basis points versus the previous quarter.

-          Adjusted EPS of $13.05 to $13.15.

The group is scheduled to provide precise guidance for FY2025 with its next results in November. However, on last week’s call, management repeated its confidence of achieving its 25% margin target for FY2025 and was happy with the current consensus estimate of $14.40 for EPS in FY2025, a level which currently leaves the shares on a very reasonable PE of 17x.

The company will also host an Investor Day next year at which it will outline the next stage of its development.

Source: Bloomberg