C.R. BARD INC. $166 (New York symbol BCR; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 74.9 million; Market cap: $12.4 billion; Price-to-sales ratio: 3.9; Dividend yield: 0.5%; TSINetwork Rating: Above Average; www. crbard.com) makes over 15,000 medical devices in four main areas: oncology products that detect and treat various types of cancer (28% of 2013 sales); vascular products, like stents and catheters (27%); urology goods, such as drainage and incontinence devices (26%); and surgical tools (16%). Other medical products supply the remaining 3%.
The company’s products are typically only used once, so customers must continually buy new ones.
Acquisition targets fit well
Bard is also benefiting from its new growth strategy, which involves selling slower-growing businesses and buying other medical device makers.
In the past three years, Bard has spent over $1.1 billion on acquisitions. That includes $298.0 million for Lutonix, which has developed a drug-coated balloon for treating clogged leg arteries. Regulators recently approved this product for sale in the U.S.
Bard also paid $262.3 million for Rochester Medical, which makes disposable medical catheters and incontinence products for patients with urinary and bladder conditions.
Thanks to acquisitions, Bard’s sales rose 20.3%, from $2.5 billion in 2009 to $3.05 billion in 2013. Earnings gained 11.7%, from $509.5 million in 2009 to $568.9 million in 2011. Due to fewer shares outstanding, earnings per share jumped 25.7%, from $5.09 to $6.40. However, earnings fell to $6.57 a share (or a total of $565.3 million) in 2012 and to $5.78 a share (or $474.9 million) in 2013.
Big jump in research spending
The main reason for the earnings drop was that Bard boosted its research spending by 45.5%, from $203.2 million (or 6.9% of sales) in 2012 to $295.7 million (or 9.7%) in 2013.
Another part of Bard’s strategy involves expanding sales outside of the U.S., which accounts for two-thirds of its total sales. The company believes its sales to clients in emerging markets like China, India, Russia and Turkey could more than double by 2020.
Bard’s balance sheet remains sound. Even after its recent acquisitions, its goodwill was $1.1 billion as of September 30, 2014, or a low 9% of its market cap. Its long-term debt was a moderate $1.4 billion, and it held cash of $971.7 million, or $12.97 a share.
The stock has more than doubled in the past five years. It now trades at 19.8 times the $8.37 a share that Bard will probably earn in 2014. Earnings could improve to $9.26 a share in 2015, and the stock trades at a more reasonable 17.9 times that forecast.
Look for an Obamacare tax rollback
However, Bard’s profits could rise more quickly in the next few years. That’s because the Republicans now control the U.S. Congress, and they have pledged to repeal the 2.3% excise tax on medical device makers under Obamacare. The stock’s $0.88-a-share annual dividend yields 0.5%.
C.R. Bard is a buy.
