High Expectations for Growth: Is CR Bard Overvalued?

Bard has significantly improved its growth outlook, but Wall Street seems a step or two ahead.

Feb 14, 2014 at 6:30PM

C.R. Bard (NYSE:BCR) finds itself in an interesting and unfamiliar situation – for the first time in quite a while, the Street actually has relatively demanding growth expectations. Bard has long based its business upon strong share in lower-average selling price consumables-driven businesses that don't offer spectacular underlying growth. Now management is looking to deliver more growth, as it prepares to leverage its new Lutonix drug-coated balloon and acquisitions driven by the incoming cash from Gore's patent infringement damages.

Bard has indeed returned to a level of growth that hasn't been seen in years. As is so often the case, though, my concern now is with the expectations that are getting baked into the valuation. With today's valuation not leaving much (if any) margin of safety, I'd prefer other names in the med-tech space.

Good growth, but at a lower margin
Bard outperformed expectations for the fourth quarter, with constant currency growth of about 4% and organic growth of around 3%. On an organic/adjusted basis, all four business lines were positive on a year-over-year basis -- vascular up was up 2% (excluding the electrophysiology divestiture to Boston Scientific), urology was up 1%, oncology was up 5%, and surgical specialities was up 1%.

Margins were disappointing this time around, largely due to higher SG&A spending tied in part to the company's recent string of acquisitions and spending intended to help drive expected revenue growth. Gross margin was OK relative to expectations, although it declined from 62.3% to 60.7%.

Lutonix data weren't as expected
One of the recent controversial points on Bard is the future of the Lutonix drug-coated balloon (DCB) in the wake of LEVANT II data. This study showed good primary potency versus angioplasty (92.3% versus 82.7%) in SFA patients, but freedom from TLR at six months was basically equal (96%) between the two groups. That's a very surprising result, as most peripheral interventions (drug-coated stents, etc.) show an advantage at six months and DCBs were/are expected to be a significant step forward. 

What is important to note is that Bard ran a particularly rigorous study. Normally "bailout stenting" (done when the angioplasty procedure dissects the vessel) is counted as part of TLR, but Bard excluded that. In addition, the doctors who evaluated the images at six months were blinded as to the treatment and control groups which generally favors the control.

I think the key opinion leaders will understand and appreciate these differences, but Bard likely still needs to show a meaningful separation between the Lutonix and angioplasty groups at 12 months for strong commercialization. I do believe that peripheral DCBs can be a $1 billion market, but pricing balloons on par with stents ($1,500 or so) could be tricky without a clear advantage at 12 months.

Bard is also still the leader in this emerging space. Medtronic (NYSE:MDT) is not far behind with its IN.PACT balloon, and Covidien (NYSE:COV) is also intending to compete with a balloon of its own. So far it would seem the data favor Bard and the Lutonix, but the differences in trial design and endpoints make that more of an impression than a conclusion.

Either way, this is going to be a battleground and the stakes are well over a billion dollars a year in revenue. Covidien has a large peripheral franchise, complete with balloons, stents, and mechanical ablation devices to treat a range of blockages throughout the peripheral vasculature. Medtronic lacks the mechanical ablation offering (as does Bard), but competes with a range of stents and balloons. In such a competitive market, any advantages in potency, TLR, ease of use, or breadth of use (Medtronic's IN.PACT failed in a European study of below-the-knee usage) will be important for market share.

A year of digestion and integration
Bard management is going to be busy in 2014, as the company needs to integrate three deals (Rochester, Medafor, Loma Vista), keep the Lutonix program moving forward, manage ongoing pelvic mesh litigation, launch new products like the Fluency Plus stent graft, and keep an eye out for additional M&A targets. If they can execute on all of that without dropping the ball, 2015 should be the start of a good multi-year window of above-average growth and improved free cash flow generation.

The bottom line
My outlook for Bard is for long-term revenue growth around 4% and FCF growth around 7%, a level of above-average growth similar to my expectations for Covidien. Wall Street is valuing that growth potential at a higher multiple, though, and Bard does not look all that cheap on a discounted cash flow basis. Likewise, the implied EV/revenue multiple for 2014 is above 3.0 and on the high end for large-cap med-tech.

Consider the following table:

EV / 2014 rev (est) 3.4 3.3 3.2
EV / TTM rev 3.6 3.4 3.3
EV / 2014 EBITDA (est) 11.9 12.1 8.5
EV / TTM EBITDA 13.2 12.4 9.8
* COV and MDT numbers adjusted for their different calendar years      

Source: Yahoo Finance

While analysts do expect more revenue growth from Bard than either Covidien or Medtronic, I believe that is already factored into the price. Taking that all into consideration, I think investors either need to have a firm conviction that Bard is going to deliver even better growth than expected, or they need to look at other names for better value today.

These three stocks may hold the key to even better returns
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Covidien. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers