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Estimating The Fair Value Of Becton, Dickinson and Company (NYSE:BDX)

Key Insights

  • Becton Dickinson's estimated fair value is US$258 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$245 suggests Becton Dickinson is potentially trading close to its fair value

  • Our fair value estimate is 9.6% lower than Becton Dickinson's analyst price target of US$286

How far off is Becton, Dickinson and Company (NYSE:BDX) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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View our latest analysis for Becton Dickinson

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF ($, Millions)

US$3.87b

US$3.90b

US$3.92b

US$4.27b

US$4.58b

US$4.80b

US$4.98b

US$5.15b

US$5.31b

US$5.45b

Growth Rate Estimate Source

Analyst x1

Analyst x4

Analyst x3

Analyst x1

Analyst x1

Est @ 4.67%

Est @ 3.90%

Est @ 3.36%

Est @ 2.99%

Est @ 2.72%

Present Value ($, Millions) Discounted @ 8.0%

US$3.6k

US$3.3k

US$3.1k

US$3.1k

US$3.1k

US$3.0k

US$2.9k

US$2.8k

US$2.6k

US$2.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$30b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.0%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$5.4b× (1 + 2.1%) ÷ (8.0%– 2.1%) = US$94b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$94b÷ ( 1 + 8.0%)10= US$43b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$73b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$245, the company appears about fair value at a 5.1% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Becton Dickinson as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.0%, which is based on a levered beta of 0.999. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Becton Dickinson

Strength

  • Earnings growth over the past year exceeded the industry.

  • Debt is well covered by earnings.

Weakness

  • Earnings growth over the past year is below its 5-year average.

  • Dividend is low compared to the top 25% of dividend payers in the Medical Equipment market.

Opportunity

  • Annual earnings are forecast to grow faster than the American market.

  • Current share price is below our estimate of fair value.

Threat

  • Debt is not well covered by operating cash flow.

  • Dividends are not covered by cash flow.

  • Annual revenue is forecast to grow slower than the American market.

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Becton Dickinson, we've compiled three pertinent aspects you should explore:

  1. Risks: As an example, we've found 1 warning sign for Becton Dickinson that you need to consider before investing here.

  2. Future Earnings: How does BDX's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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