In an economic downturn, businesses and consumers rush to conserve their resources and cut spending as quickly as possible. There’s no telling how long a downturn may last, so taking a conservative stance on making purchases can easily make sense.

But there are some things a person simply can’t do without.

The health care industry, for example, has typically been characterized as a defensive sector. But not all health care stocks are created equal.

We saw how this has played out in the latest recession. Hospitals have cut back on buying expensive medical equipment and facilities, or are keeping existing equipment longer. From the patient side, there has been a big reduction in expensive knee and hip replacement procedures, for instance, as those with borderline needs for treatment would rather stay at work and earn a steady paycheck than take time off for an expensive elective surgery.

On the flip side, every industry requires basic necessities that cannot be skimped on, except in the direst of economic circumstances. In health care, basic, low-cost supplies consist of needles, syringes, blood-collection products and devices that help store medical specimens. These are EXACTLY the things people can’t do without, and it’s EXACTLY these kinds of products that make great defensive investments. After all, people still need blood work and vaccinations, for example, regardless of the state of the economy.

Companies that sell these products have a high degree of sales and profit stability, and there’s one stock in particular that I believe provides investors with the industry’s safest downside protection and the best upside potential.
 
Becton Dickinson (NYSE: BDX) sells all of the above mentioned medical products worldwide. Its three main divisions sell medical, diagnostic and bioscience supplies to hospitals and related health care providers. Other primary customers include clinics, physician’s offices, reference laboratories and research labs.

The products Becton Dickinson sells are definitely mundane, but management has a stellar track record of growing sales and boosting profits along the way. During the past decade, it has leveraged average annual sales growth of nearly 8% into impressive annual profit gains above 14%. In the same period, sales have doubled from $4 billion to nearly $8 billion, while earnings per share (EPS) have more than tripled from less than $2 to nearly $5.59.

Sales projections for the next couple of years are quite modest, averaging in the low single digits. Toward the end of 2013, sales will likely reach close to $8.5 billion, only a slight improvement from current levels. Most importantly, international sales are growing rapidly. Half of Becton Dickinson’s annual sales stem from outside of the United States, and they increased a whopping 16% during the most recent fiscal year, compared with domestic growth of 1.6%. Also important, profit gains are set to continue their double-digit growth ways, with EPS estimated to reach roughly $6.40 within two years.

Going forward, the company has a number of avenues it can pursue to outgrow the industry and make money for shareholders. The company has a long history of prudently deploying excess capital, supplementing internal growth with acquisitions such as Carmel Pharma AB, a Swedish manufacturer of a drug-delivery device for hazardous drugs that are delivered in vials. It also uses excess capital to buy back stock, which boosts per-share earnings results through the reduction of shares outstanding.  In the past three years, for example, it has bought back nearly $3 billion in stock, or nearly 20% of its current $17 billion market capitalization.

Action to Take -> At a forward price-to-earnings (P/E) ratio of 14.1, which is well below the industry average of nearly 22, Becton Dickinson trades at a reasonable valuation given the double-digit growth of at least 10% analysts expect it to post in the coming years.

Due to the basic health care necessities Becton Dickinson sells, a key part of the stock’s appeal is its downside protection. This is especially important in today’s economic climate, with the current fears that Europe could send the global economy back into deep recession. The below-industry valuation also offers solid downside protection.

Within two years, I estimate the stock can reach $100, or 25% ahead of current levels. This is based off the expectations for at least 10% earnings growth, 2.3% current dividend yield and potential for multiple expansion. I see a multiple closer to 16 as justifiable and still below the industry average. In today’s low-growth environment, it represents one of the safest ways I know of double-digit returns for investors.