Stability From a Likely Source

On a day when investors were worried about falling house prices affecting almost every industry under the sun, medical device and lab supply company Becton Dickinson (NYSE: BDX) stood tall on solid earnings.

The company earned $240 million from continuing operations, compared to $211 million in the year-ago quarter. The 14% growth in earnings was due to a combination of a 12% growth in revenue and increases in gross margins.

Revenue was up across all three of the company's units. The diagnostics business saw sales jump 15% percent to $492 million, $27 million of which came from its acquisition of TriPath, which was finalized in December of last year. Sales in the biosciences unit, which includes sales of supplies to research labs, were up 13% for the quarter. The medical unit lagged behind the others and only grew a still-impressive 10% on strong demand for its refillable drug delivery devices and disposable pen needles.

The company raised expected 2007 earnings for the second time this year. It now expects to earn between $3.81 and $3.83 per share, excluding certain items; this is a 14%-15% increase over 2006 earnings. Some of the earnings are expected to come in the form of increased net margins and lowered interest costs, since revenue growth is only expected to increase about 10.5%. While all investors like to see increased margins, it's hard for companies to grow earnings that way for very long, so I'd keep a closer look on the top-line growth rather than the bottom line.

Becton Dickinson didn't release a balance sheet with the earnings press release -- investors will have to wait for the 10-Q -- but there's a good chance the company is still sitting on a lot of cash. It will use some of that to pay out its dividend, which is currently at about 1.3% yield. The company's also trying to increase shareholder value by buying back shares; earlier this week, it announced plans for another 10-million-share buyback. Personally, I'd rather see Becton use that money to continue buying undervalued medical device and supply companies, rather than investing in its overpriced stock.

On many measures, Becton Dickinson's multiples have been creeping ever higher over the last five years, without an increase in its expected growth rate. The stock is also trading at all-time highs. While I think Becton's a great company that can continue to increase revenue, I also think investors should look at other medical device supply companies like Kinetic Concepts (NYSE: KCI) or Baxter (NYSE: BAX). Alternatively, you can wait until the stock goes out of favor and then jump on the bandwagon.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool's disclosure policy is rock-solid.