This Healthcare Stock Can Continue Its Rally

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Thanks to an expanding product portfolio, increasing healthcare spending, and explosive growth in the emerging markets, the healthcare industry has been growing at a stellar rate lately. Medical supplies and equipment providers are benefiting the most, as they serve the global healthcare industry. One of the most prominent beneficiaries has been Becton Dickinson (NYSE: BDX), which has recorded an appreciation of 45% over the last year. But, despite the recent rally, a couple of reasons suggest its shares could still head north.

Retaining growth momentum

Becton Dickinson operates in over 50 countries with over 30,000 employees. Since it manufactures medical supplies (like syringes) and medical equipment, without venturing into drug manufacturing, its top line is much more stable (and less volatile) than other healthcare companies. According to FY11 estimates, its global market share stood at 3.6%, which was comparable to Baxter International’s (NYSE: BAX) 4.4%, but lower than Johnson & Johnson’s 6.6%.

To capture a greater market share, Becton Dickinson has been aggressively launching new products over the last couple of years. And it is due to this reason that Becton Dickinson had one of the highest healthcare R&D budgets in FY12. Over the last five years, its R&D expenses have risen 13.3% while its revenue has grown by 14%.

But, the point to note here is that its R&D expenses have consistently increased over the last two years. This suggests that either Becton Dickinson is hemorrhaging cash in failed trials (which is less likely), or its product pipeline is still going strong. Its management recently stated that it will gradually unveil a wide range of new products in FY13, suggesting that Becton Dickinson will most likely retain its growth momentum.

Capturing growth abroad

Besides that, its U.S segment generates nearly 40% of its overall revenue, while the rest is accounted for by its international revenue. Though this indicates a well diversified revenue mix, it also partly points towards its tremendous growth potential. Its revenue from emerging markets accounts for just 23% of its overall revenue, which its management aims to increase to 50%, as a part of its long-term goals. This is an aggressive goal, but by no means, overly optimistic.

For the recent quarter, its U.S-based revenue crawled up 1.6%, while its international revenue grew 11.1% YoY, on a constant currency basis. Its international growth was mainly bolstered by China’s revenue growth of 30% YoY, which is also driving up its sales from emerging markets. Its management recently stated that revenue from emerging markets could continue to grow at a low double-digit rate, which would be mainly driven by China’s estimated 20% plus revenue growth rate.

Comparable peers

On the other hand, shares of Baxter International have also risen an impressive 37% over the last year. Apart from manufacturing medical supplies and equipment, Baxter is also involved in the manufacturing of medical drugs. This not only gives it diversity, but also makes it more volatile. Shares of Baxter crashed shortly after its Phase – III trials of Alzheimer’s drug failed. And as a result, its shares have largely remained flat over the last six months.

Meanwhile, shares of St. Jude Medical (NYSE: STJ) have surged nearly 50% over the last year. The company manufactures and markets cardiovascular medical devices, and is the second largest manufacturer of Cardiac Rhythm Devices in the U.S. But, on the downside, St. Jude isn’t as geographically diversified as its peers mentioned above are, which makes it a volatile play. For FY13, management of St. Jude expects its annual EPS to average around $3.70 - $3.73 per share.

Final words

From the standpoint of valuations, both Baxter and St. Jude appear to be undervalued. However. Becton Dickinson seems to be fairly valued. But, it's worth noting that Its ROE of 34.8% is one of the highest in the entire healthcare industry. Besides that, analysts expect its annual EPS to grow nearly 9.5% over the next five years, and Argus estimates that its shares could appreciate another 15%. Keeping all the reasons in mind, I believe that Becton Dickinson is a good investment option.

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Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Becton Dickinson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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