This past weekend, news emerged that Becton, Dickinson and Co. (BDX) has entered into an agreement to purchase C. R. Bard (BCR) for $24 billion in cash and stock. Both medical technology companies manufacture and market medical supplies. The transaction has already been approved by both companies’ boards of directors and the stock merger is poised to go through.
Shareholders of C. R. Bard will receive an approximate value of $317 per share, composed of $222.93 in cash and 0.5077 shares of BDX per share of BCR. The value of BDX will likely fluctuate moderately throughout the year until the transaction closes in the fall of 2017.
[text_ad]
There are lots of articles that you can read about the two companies, their products and revenues, and the expected synergies of their stock merger. I’m here to help you decide what to do with the stocks. Here’s what you need to know:
1. If you’re hoping for a competing offer to emerge that can drive the price of BCR even higher, that’s unlikely to happen. The two companies have already agreed to merge. BCR shareholders should be grateful for the capital appreciation. Now it’s time to make a decision on whether to hold your stock or sell it.
2. If you hold BCR, the share price will remain relatively unchanged until the merger goes through. That means you’re looking at approximately six months of a stagnant share price. Do you want your stock to sit there and do nothing for six months? Probably not. If you sell BCR and buy another investment, odds are fairly good that you’ll get that principal moving right away.
3. When corporate mergers are in the works, shares of the acquiring company—in this case, Becton Dickinson (BDX)—tend to stagnate until long after the deal closes, while the market waits to see several quarters of post-merger financial results. Therefore, not only do BCR and BDX shareholders have relatively flat share prices to look forward to in 2017, but their principal probably won’t change much in value until about a year from now. At that time, if the market is pleased with quarterly revenue and profit results, BDX could begin rising again.
4. Is BDX a good investment?
| Stock | 2017 EPS Growth | 2018 EPS Growth | Dividend Yield | Long-Term Debt Ratio |
| BCR | 13.2% | 10.3% | 0.41% | 49.5% |
| BDX | 10.0% | 10.2% | 1.58% | 55.0% |
As of April 21, the last business day before the stock merger announcement, Wall Street consensus estimates projected both BCR and BDX to grow earnings per share (EPS) by 10% to 13% per year in 2017 and 2018. Those numbers are decent. However, BDX has price/earnings ratios (P/Es) in the 17 to 20 range in 2017 and 2018. I don’t like owning stocks that have P/Es higher than their earnings growth rates; although it’s not unusual for medical and pharmaceutical companies to have high P/Es. BDX also has a higher long-term debt-to-capitalization ratio than I would prefer, at 55%. The company will additionally be taking on more debt in order to complete the purchase of BCR.
The combination of the high P/E and very high post-merger debt levels convinces me that there’s no capital gain opportunity for me with BDX.
You can probably tell, at this point, that I’m not a big fan of holding stocks when history tells us that they’re not likely to perform well in the foreseeable future. BCR shareholders hit the jackpot this month. There’s no additional jackpot waiting in the wings. It’s time to take the money and run.
BDX shareholders have no similar jackpot awaiting them. Rather, odds are strong that the market just dashed their hopes that BDX might deliver additional capital gains this year. However, they have been lucky enough to receive very good capital appreciation in recent years, despite the stock’s high P/E. If I were a BDX shareholder, I would sell my stock now, and move on to another growth stock opportunity.
Subscribe to Cabot Undervalued Stocks Advisor today for excellent suggestions on undervalued growth stock opportunities.
[author_ad]
