Banking On Bard (BCR)

C. R. Bard (BCR), in business for over 100 years, makes a wide variety of medical-surgical supplies and instruments.  According to Value Line, Bard has four core segments: Urology (29% of 2008 sales), primarily Foley catheters; Vascular (26%), stents and angioplasty & angiography catheters; Oncology (26%), specialty catheters & ports, other related products and test materials; and Surgical Specialties (15%).

- Bard’s 2008 Annual Report explains that the company’s EPS growth was above its 14% target for the sixth consecutive year and that it raised its dividend for the 37^th consecutive year. Some 80% of BCR’s 2008 Sales came from products that were number one or two in their respective markets.  And, Bard’s products are sold in over 100 countries and it will be expanding to China and Brazil in 2009.

- I used the Bob Adams one-click spreadsheet to analyze Bard’s 2008 Annual Report and found 11 Bullish results (good things) and 5 Bearish results (not so goods), one red flag (cash flow growth is less than sales growth), and an overall score of 61 out of 100. You can get Bob’s free spreadsheet and a summary of its many features by going to my Favorite Links page: click here .

- Bard was this month’s Online Stock Study at the Better Investing website.  These studies complete a SSG in about one hour with all judgments made by consensus decision-making.  The study materials (SSG, audio-video presentation, presentation slides, and Value Line report) are available to members at the BI website.  And, all of the past monthly studies are also archived and available to BI members.

** Bob Mann, a volunteer educator with the BI Southeastern Michigan Chapter and a volunteer administrator at the CompuServe Investing for Growth Forum, led the study.  Thanks Bob for a super study.

- Below is a table that compares the Consensus SSG with my SSG and with Take Stock.  I’ve also added an earlier SSG by Bob that came from BI’s First Cut page where members  can up- and download SSGs on a two-page form that explains their judgments. 

** I’m a big fan of the monthly Online Stock Studies and First Cut; you can check them out with a free, 30-day trial membership by clicking the link above and going to my Favorite Links page which has more info on BI.

** After the table, I discuss all five judgments of the Consensus SSG.  That was what most readers wanted according to the last poll I took.

Bard, C. R. (BCR)	Bob Mann (First Cut)	Consensus SSG	Armin	Take             Stock
Date	12-31-08	5-25-09	5-25-09	5-25-09
Data	S&P	Same	Same	Hemscott-Morningstar
Price	$84.26	$71.46	Same	Same
52 week High & Low Price	$101.61 &    $70.00	Same &        $68.94	Same &           Same	n/a
Project Growth   From End of	Last             Quarter	Same	Same	Last                 Fiscal Year
Last Q of data	Q3 ending  9/30/08	Q1 ending     3/31/09	Same	Same
Sales Growth	12.00%	9.00%	10.00%	10.40%
EPS Growth	12.00%	9.00%	10.00%	05.20%
High PE	22.0              (Alt-M)	21.8	19.0	22.7
High EPS	$7.53	$7.03	$7.36	$5.23
ForecastHigh Price	$165.70	$153.30	$139.80	$118.58(~$22/sh        < VL)
Value Line Estimated High Price= $140-175 as of 2-27-09                        and  $140-170 as of 5-29-09
Low PE	14.4               (Alt-M)	Same	13.8	15.9
Low EPS	$4.27           (TTM)	$4.57           (TTM)	Same	$4.11
Forecast              Low Price	$61.50          (low PE x         low EPS)	$65.80         Same	$55.20            (80% x 52         week low)	$65.35               (low PE x          low EPS)
Upside/Down	3.6	14.4	4.2	7.7                  (imputed)
Total Return	15.7%	17.2%	15.2%	11.6%
SSG Buy Under	n/a	n/a	$64.81	$61.67
RV/PRV(no outs)	94.3/84.3	73.2/67.4	Same/66.7	n/a
Quality	n/a	n/a	S&P = A	TS 2.6         unacceptable
PTPM – 5 yr ave	23.7%           trend up	25.0%          trend up	25.0%              trend up	24.4%          trend n/a
ROE – 5 yr ave    End Equity	n/a	n/a	20.7%              trend up	n/a
ROE – 5 yr ave    Start Equity	20.1%             trend up	21.7%            trend even	23.7%                trend even	23.9%                trend n/a
Debt to Equity      – 5 yr ave	n/a	n/a	07.2%              trend even	n/a

Consensus SSG:

- The first thing Bob did was evaluate the quality of Bard.  While S&P gave BCR an “A” rating, Bob also wanted to see what the SSG showed.  He concluded that Bard was a quality company after looking at three indicators: low debt (7.0% debt to capital, much less than 33.0% guideline); quality historic growth (up, straight and parallel trend lines in SSG Section 1); and quality management (up or even PTPM and ROE trends in SSG Section 2).

** Bob would not complete any SSG if the company did not pass these three tests

.  On the other hand, I am willing to make an exception for a PTPM or ROE downtrend if the company substantially exceeds its industry average.  I did that, and explained why, in my last post: Gauging Growth at Gilead (GILD).

(A) Estimating Future Sales Growth:

- For the first SSG judgment call, Bob gave the group four options to estimate Bard’s Sales growth for the next five years: 10.4% (10 year historic growth), 16.2% (4 year historic growth), 9.0% (next 3 year estimate from the S&P Stock Report), and 2.1% (latest quarter).  There also was a fifth option (choosing none or submit your own pick) for all five SSG judgments) which I’m not going to mention again.

** The consensus decision was 9.0%, the most conservative annual option, from the S&P estimate. 

(B) Estimating Future EPS Growth:

- Participants were also given four choices to estimate EPS growth for the next 5 years: 9.0% (same as the Sales growth choice), 14.5% (5 year historic growth), 13.0% (next 3 year estimate from the S&P Stock Report), and 10.4% (latest quarter). 

** The consensus was 9.0%, same as the Sales growth choice.

(C) Projecting the High PE:

- The group was offered four options: 21.8 (average of the 5 lowest years), 22.8 (High PE from the most recent year), 18.0 (2 x 9.0, two times the projected EPS growth or a PEG of 2), 13.5 (1.5 x 9.0, a PEG of 1.5).

** The group chose 21.8, the average of the 5 lowest years.

** This choice is Toolkit 5’s Alt-M command which is usually the most conservative of the four options offered by the software.

(D) Projecting the Low PE:

- Bob gave the participants four choices: 14.4 (average of the 5 lowest years), 15.7 (low PE from the most recent year), 16.4 (ten year average), and 9.0 (1.0 x 9.0, a PEG of 1.0).

** The consensus choice was 14.4, the average of the 5 lowest years which is also from the Alt-M command.

(E) Projecting the Low Price:

- For the last SSG judgment call, the group was given five options, the first four of which were the standard choices from the TK 5 software: $65.80 (low PE x low EPS), $61.50 (average low price in last 5 years), $68.90 (recent severe low price), $54.60 (price the dividend will support), and $57.20 (the open-ended “other” option which Bob individualized as 80% of the current price).

** The consensus choice was $65.80 (low PE x low EPS).

(F) SSG Results:

- Bob uses three tests to determine if the stock is a SSG Buy: an Upside/Downside Ratio of 3.0 or greater (Bard’s U/D was 14.4, well above the minimum); a Total Return of 15.0% or greater (Bard’s TR was 17.2%); and a Relative Value between 85-100 (Bard’s RV was 73.2 and did not satisfy Bob’s criteria).

** The SSG Handbook from BI/NAIC says that a “Relative Value between 85-110 is ideal” (page 113, 2003 edition) which suggests, at least to me, that RV is not a mandatory criteria.

** I am not a fan of the RV or Projected RV: they turn on the outliers eliminated in SSG Section 3 (you and I may make different choices which are never revealed) and is also an unreliable indicator in a Bear market like our current one where the price (and, as a result, the PE and RV) have fallen considerably.

- I always like to compare the SSG’s Forecast High Price ($153.30) to Value Line’s estimated High Price ($140-170) which I use as one benchmark to judge reasonableness.  If my Forecast High Price was substantially higher or lower than VL’s estimate (as is the case here with Take Stock, but not with the Consensus SSG), and I didn’t have a good reason supporting my opinion, I would reconsider my judgments: See: Determining What’s Reasonable and What’s Not

- Bob’s earlier SSG used almost the same judgments, but got a much higher U/D (14.4 vs 3.6) primarily because Bard’s price had fallen by $13 per share in the intervening five months.

Armin’s SSG:

(A) Estimating Future EPS Growth:

- When I did my SSG, the six analysts I always check were closely estimating long-term EPS at an average of 13.92% with Zacks.com high at 14.20% and Value Line low at 13.00% (VL has since lowered its estimate slightly to 12.50%).  S&P and FactSet CallStreet via CNNMoney were both 14.00% and Reuters.com and FirstCall via YahooFinance were both 14.17%.

** At Reuters, 8 analysts contributed to the consensus estimate and ranged from a high of 16.0% to a low of 13.0%.  At CNNMoney, 6 analysts ranged from a high of 15.0% to a low of 13.0%.

** I estimated 10.00% EPS, well under the analysts, and the combination of my EPS estimate and High PE resulted in a $139.80 Forecast High Price, at the very low end of VL’s estimated $140-175 High Price. 

** I’m comfortable with my conservative SSG judgments especially, as here, when I know next-to-nothing about the company.

(B) Bard’s PTPM and ROE vs Industry Averages

- S&P places Bard in the Health Care Equipment industry and BCR is better than its 5 year industry average in terms of Pre-Tax Profit Margin (25.0% vs 16.8%) and Return on Equity (20.7% or 23.7%, depending on how ROE is calculated, vs 14.00%).

- Hemscott-Morningstar places Bard in the Medical Instruments and Supplies industry which has 118 companies.  With Hemscott data:

** Bard’s Pre-Tax Profit Margin ranks ninth, is slightly better than its industry average (24.3% vs 22.8%), but the industry average is skewed high (one company has a 311.4% PTPM).

** Bard’s Return on Equity ranks eighth, is worse than its industry average (20.8% vs 31.9%), but the industry average is also skewed high (two companies have a 690.5% and 100.5% ROE).

- For more on industry info, which can be confusing, see Investigating Industry Info.

(C) SSG Results:

- My SSG satisfied the Buy criteria with a 4.2 U/D and 15.2% TR and my Forecast High Price was at the very low end of VL’s estimated High Price.

** VL’s estimated High Price is for the next 3-5 years and I think it is an appropriate benchmark for our SSGs because it is for the next 5 years (and 4 as well as 3 years).  Moreover, I consider a SSG Forecast High Price to be unreasonable only if it substantially exceeds or falls below VL and only if I have no good reason supporting such a judgment.  Further research can provide a good reason and VL does not always have the best judgment. 

** It looks like many SSGs will satisfy the minimum BUY criteria (TR = 15%, U/D = 3.0) as BCR’s price has fallen 15% in the last 3 months since VL’s February report.

Take Stock:

- Take Stock is a computerized, one-click program at the StockCentral website that is designed to produce a conservative result with no judgment by the user.

** It estimated extremely low EPS growth (5.2%) compared to the analysts (13.92% average) which resulted in an extremely low Forecast High Price, $22/share under the low end of VL’s estimated High Price.  As a result, Take Stock got a low TR of 11.6% which does not satisfy the Buy criteria.

** Tale Stock’s Quality rating was 2.6, or unacceptable, as a minimum of 3.4 is required to pass muster and 6.7 is desired.  On the other hand, S&P rated Bard an “A”, the second highest of its 8 grades.

 

-Armin

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