If you paid attention to the headlines, you’d think now is a risky time to invest in healthcare.
First off, there’s the day-to-day turbulence we’ve been seeing for the past few months.
Plus, outrage about ObamaCare, high drug prices and rising medical bills means healthcare will remain a controversial – and volatile – sector in the short term.
But that’s just one side of the story.
Rapidly aging populations in North America, Europe and East Asia and ever more frequent and devastating disease outbreaks – like Ebola in 2014 and Zika right now – mean that healthcare spending is destined to escalate for years to come. For instance, global drug spending alone will soar 30% by 2020, to $1.4 trillion, according to IMS, making the life sciences as solid a long-term investment as you can find right now.
So today I want to introduce you to the one medical-tech firm that can get you through this temporary volatility. This company furnishes tools that are crucial for both doctors who treat aging populations here at home and the courageous medical professionals who battle epidemics around the world.
It recently completed an acquisition that doubles the company’s addressable market to $16 billion.
And it’s set for triple-digit gains by 2021.
Take a look…
On the Front Lines Against Disease
Back in 2014, some analysts touted Becton, Dickinson and Co. (NYSE: BDX) as an “Ebola stock” because it’s a leader in disposable medical equipment.
I’m talking about syringes, gloves and other garments, surgical instruments… just the sort of equipment that’s needed on the front lines of our wars against Ebola, Zika and other epidemics.
That’s true – but BD is much more than that.
BD dates back to 1897, when its two founders – Maxwell Becton and Fairleigh Dickinson – teamed up to sell syringes and other medical devices. It was perhaps the world’s first “medtech” company.
BD still makes disposable surgical devices, but it also develops diagnostic and analytic systems (such as blood tests) and cutting-edge bioscience solutions (such as kits for cell analysis). Its clients include hospitals, physicians’ offices, public health agencies and research laboratories.
It’s also heavily focused on diabetes care, a market with strong upside given the nation’s obesity epidemic. The global market for type 2 diabetes will be worth $19 billion by 2019, according to a new report from GBI Research.
And BD will be able to help diabetes patients around the world. Roughly 60% of sales come outside the United States, with 25% of the total occurring in emerging markets that offer fast population growth and rising incomes.
This is truly a global healthcare behemoth. In all, the company employs 45,000 people, markets products in 50 countries around the world and has a $29.22 billion market cap.
And thanks to the world’s growing healthcare needs, there’s nowhere for BD to go but up.
While its average growth rate has dropped over the past 50 years, healthcare spending still greatly outpaces inflation and the U.S. economy. Since 1961, healthcare purchases as a proportion of U.S. gross domestic product (GDP) has more than tripled – from 5.2% to 17.4%.
PwC found that despite every effort by government officials and insurance companies to rein in costs, Americans will spend 6.5% more on health care this year than they did in 2015.
At that rate, spending on prescription drugs, healthcare services and medical devices is still growing nearly three times faster than our economy.
Add it all up and you have several “turbochargers” set to raise BD’s and other healthcare stocks’ share prices.
And by spending much of 2010 through 2012 gearing up for global expansion and beefing up its mergers and acquisitions program, BD manufactured its own share-price turbocharger.
Let’s look at the results…
A Medical Marriage
In March 2015, that planning paid off when BD completed its acquisition of CareFusion Corp. (NYSE: CFN) for roughly $12.5 billion in cash and stock.
So far, it’s a good partnership. For example, BD sells catheters that healthcare workers use to administer drugs. CareFusion supplies the machines that pump the drugs into the catheters.
Those kinds of synergies are helping hospitals cut costs while delivering some $250 million in savings for BD.
CareFusion also beefs up BD’s tech prowess. The acquired firm develops and markets for hospitals sophisticated pharmaceutical-tracking software, patient-identification systems and patient-monitoring equipment.
More to the point, this bolt-on acquisition already has added 20% to earnings growth – and it more than doubles BD’s worldwide addressable market from just shy of $8 billion to $16 billion.
Indeed, CareFusion is already materially improving Becton’s results. During fourth-quarter 2015, sales climbed 39% to just over $3 billion as adjusted earnings rose 11.5% to $1.94 a share.
In the next year, analysts have a consensus target price of $170.50 on the stock, with a high-water estimate of $180 – about 31% above its current price of $137.50.
But we’re looking for more than that. Analysts and BD expect earnings growth this year of 17%. For 2017, the growth should come in at 11%, and then rise by 12% for fiscal 2018.
That gives us a three-year average of roughly 13.5%. At that compound annual rate, earnings should double in just shy of 5.5 years. Because price appreciation tends to track earnings growth, we could see the stock double over the period.
But personally, I think it pays to be conservative, especially in choppy markets like we’re seeing. And so, I think to 50% growth over the next five years – still plenty of upside – is highly likely.
This is a stock that already boasts a great track record.
Even after the market’s current selloff, BD has delivered five-year gains of more than 62.9% – easily besting the S&P 500 Index’s 43.7% return over the same time frame.
Add in a 1.8% dividend – which the company has been raising annually for at least 44 years – and you’ve got a good long-term “total return” story here.
And all we really had to do to find it was practice Rule No. 2 – Separate the Signals From “The Noise.”
We ignored all the noise about healthcare controversies and temporarily turbulent markets, and instead stuck to our mission here at Strategic Tech Investor– follow the fundamentals that make you money in good times and bad.