The U.S. population is getting older and per capita health care spending has been rising — other than the pandemic blip — very steadily for half a century. We’ll detail a simple trade on a resilient health care industry stock that stands to benefit from that long-term trend. For most of that time healthcare expenditures, as a percentage of GDP, have risen, although the pace of that relative growth has slowed. Becton Dickinson (BDX) has a large array of healthcare products and consequently doesn’t exhibit the volatility that some other health care companies have like biotech. It’s a lower risk business and we have a defined risk way to play it. Unsurprisingly, when we look at the health care sector, we also see consistent long-term growth. The Health Care Select Sector Index (IXV) includes more than 60 companies in pharmaceuticals, biotech, equipment, managed care, service providers and distribution. Although revenue growth has been quite monotonic, profitability has been slightly lumpier. There are businesses within the index that have seen enormous revenue and profit volatility over the past several years, such as Moderna Inc (MRNA), which consistently lost money pre-pandemic, recorded $21.5 billion in profits on vaccine sales and has subsequently recorded the largest operating losses in the company’s history. Consensus estimates for 2023 are net losses of greater than $5.2 billion. These kinds of sharp swings, in big companies can contribute to modest declines in the net earnings and margins for the sector overall. The earnings multiple for the index overall has fluctuated between about 16 times and 24 times earnings (if we ignore the brief trough in March/April 2020). Becton Dickinson manufactures and sells a wide array of medical supplies, devices, laboratory and diagnostic equipment. From syringes and catheters, to diagnostic tests to sophisticated diagnostic tests and tools and automated dispensing systems, the company is very different from biotechnology and pharmaceutical companies that rely on demand for a limited set of drugs. As a result, the company has delivered consistent, albeit modest topline growth over the past 5 years. The trade The response to the most recent earnings results from investors have been fairly lackluster, and as of today we have another to digest. Purchasing long(er) dated calls provides upside exposure with defined risk. For example, the September $240 calls risk $17 per share (x 100 shares = $1,700 in total), and one can write/sell shorter dated calls against that position, much like selling “covered calls” against stock to mitigate the time decay (aka “theta”). DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
