Morning Note: Market news and an update on Becton Dickinson.

Market News

US equity markets rose last night: S&P 500 +1.3(%), Nasdaq (+1.3%). Three big tech companies reported after hours with mixed response. Meta’s (+15%) outlook topped estimates. It plans an additional $50bn in share buybacks and will pay its first-ever dividend in March. Amazon (+7%) also rose after reporting robust sales and its profit outlook beat. Apple (-3%) highlighted weak revenue from China sparking fears that the prized market is at risk. Intel slipped postmarket after the WSJ reported it’s delaying a $20bn chip facility planned for Ohio due to market challenges and the slow rollout of government grant money. Production at the plant was initially seen starting in 2025, but construction now isn’t expected to be finished until late 2026.

US initial job claims (+224K vs. +212K expected) and continuing job claims (+1898K vs. 1839K expected) surged as layoffs accelerate. The focus is now on today’s non-farm payrolls, with 185K expected. This is less than December’s strong 216,000, though the whisper number suggests a more resilient gain of 211,000. The unemployment rate may inch up to 3.8%. The report will also contain annual revisions to past 2023 hiring figures, and downward adjustments may test the Fed’s belief it can afford to wait before cutting rates, Bloomberg said. The 10-year Treasury yield moved below 3.9%, while gold moved up to $2,055 an ounce.

This morning in Asia, markets were mixed: Nikkei 225 (+0.4%); Hang Seng (-0.1%); Shanghai Composite (-1.5%). The FTSE 100 is currently trading 0.3% higher at 7,647. Brent slipped to $78.85 a barrel on disappointing OPEC+ supply news. The uranium price jumped by 5% to $105 a pound as leading miner Kazatomprom lowered its 2024 production outlook by 12%-14%.

As expected, the Bank of England left interest rates unchanged at 5.25%. MPC members were split three ways, with two voting for a hike and one voting for a cut. The Bank cut its outlook for inflation and said interest rates are ‘under review’, dropping its guidance that borrowing costs may have to rise again. Sterling is $1.2750 and €1.1722.

Source: Bloomberg

Company News

Yesterday lunchtime, Becton Dickinson released results for the three months to 31 December 2023, the first quarter of its financial year to 30 September 2024. The figures were better than market expectations because of strong margin execution, and the group raised its earnings guidance for FY2024. In response, the shares were up 1% during US trading hours.

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 group’s 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 in the Surgery business sold. In addition, the exit of lower margin products and markets has seen more than 2,500 stock lines removed. The number of SKUs has been cut by 20%, achieving the 2025 target a year early, with further a further reduction expected. The result is a more simplified portfolio and increased efficiency able to drive improved operating leverage.

As expected, the financial year got off a slow start, with organic revenue growth under-indexing the full-year guidance of 5.25%-6.25% driven by a tough comparative base for covid testing and market dynamics in China. Revenue was up 1.6% on a currency-neutral basis to $4.71bn, in line with the market expectation. Organic growth (i.e., excluding acquisitions) was 2.4%, below the management guidance of c. 3.5%, although as we highlight below, full-year revenue guidance has been nudged up.

By region, growth in the US (+0.7% to $2.75bn) was outpaced by the International business (+2.9% to $1.96bn). China remains a challenge (-5.7%), stemming from value-based pricing and a slowdown in exports of pharmaceutical products.

By division, BD Medical (47% of sales) grew by 2.4% in organic terms. BD Life Sciences (27% of sales) fell by 2.5%, primarily driven by the comparison to the prior-year respiratory season. BD Interventional 25% of sales) was up 8.4%.

Over the last couple of years, the group acted early to deal with rising input inflation and supply chain issues. During the latest quarter, the gross margin fell by 180bps at constant currency to 51.1%. The operating margin fell by 90bps at constant currency to 20.2%, albeit better than management expectations. Adjusted EPS fell by 2.0% on a currency-neutral basis to $2.68, versus the market forecast of $2.40.

The group generated $0.9bn of cash flow, better than management expectations, to leave financial gearing at 2.7x net debt to EBITDA, just above the target of 2.5x. Cash flow is being 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 versus $0.8bn in 2020. In the latest quarter, the group received clearance from the US FDA for its BD MiniDraw Capillary Blood Collection System, a novel blood collection device that obtains blood samples from a fingerstick that produce lab-quality results for some of the most-commonly ordered blood tests. In addition, the group launched the SiteRite 9 Ultrasound System which is designed to aid clinicians with first attempt insertion success when placing catheters, IV lines, and other vascular access devices.

The group also plans to deploy $1.5bn-$2.0bn per year on tuck-in acquisitions. A progressive dividend policy has been maintained for 52 consecutive years, with an indicated annual rate for FY2024 of $3.80, up 4.4%, and equal to a yield of 1.6%.

Last summer, Becton received FDA clearance for its Alaris Infusion System, a product that was removed from the market in 2020 following a call for more information on a software upgrade. The group is gradually resuming full commercial operation with an enhanced and updated market-leading system that can safely deliver medications, fluids, and blood products to support patient care. Shipping of updated devices began last September.

The group has raised its full-year earnings guidance for FY2024 and the mid-point of its organic revenue growth guidance:

-          Base organic revenue is expected to grow by between 5.5% and 6.25% (vs. 5.25%-6.25% previously) to $20.2bn-$20.4bn. This includes a headwind of over 25 basis points from the expected decline in COVID-only diagnostic testing and a 75bps China headwind.

-          The operating margin is still expected to grow by 50bps (vs. 23.5% in FY2023) with a flat gross margin (53.5%) and positive SG&A leverage.

-          Adjusted EPS of $12.82 to $13.06 is now expected (vs. $12.70-$13.00 previously), a 7c increase (0.5%) at the mid-point. This includes absorbing an estimated 75bps negative impact from the divestiture of the Surgical Instrumentation platform.

Given the second-half weighting of the guidance, the company still has a lot to do to satisfy the market, but this update is a reasonable start.

Source: Bloomberg