We are upgrading our recommendation for Becton, Dickinson and Company (BDX) to Neutral after taking into account its improved prospects for safety needles in Europe. However, we continue to be concerned about the lingering slowdown in demand growth for the company’s products due to macroeconomic uncertainty, which is affecting hospital, lab and doctor-based demand for consumables in the U.S.
Becton reported third-quarter fiscal 2011 earnings per share of $1.29, which were higher than the Zacks Consensus Estimate by 4 cents but trailed the year-ago figure by a penny. Revenues came in at $1.88 billion, up 3.2% year over year (or 3.9% in constant currency) and ahead of the Zacks Consensus Estimate of $1.86 billion.
The pros and cons of investing in the company now appear to be more balanced than before. During the third-quarter, the European Commission published the health care workers’ safety provision. Although member states have three years to adopt the provisions into law, Becton expects the provisions to have positive, long-term impact on needle sales in Europe.
The company has implemented several efficiency measures, particularly in the areas of manufacturing cost containment and enterprise resource planning. Such efforts contributed to stronger cash flows; Becton remains committed to creating shareholder value by deploying free cash flow for its share repurchase program.
On the negative side, Becton continues to be plagued by the severity of competition, whereby it has to compete with numerous players in multiple product lines. Its growth prospects for safety needles are now low, at least in the virtually saturated domestic market. Moreover, margins may come under pressure on account of high raw material costs.
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