At Baxter, Growth Is In The Blood

11/2/2009


  Recent Price
$55
  Dividend
$1.04
  Yield

1.9%

  P/E Ratio
16
  Shares (millions)
612
  Long-Term Debt as % of Capital
35%
  52-Week Price Range
$62.50 - $45.46

The first company to commercially prepare intravenous treatments, Baxter International ($55; BAX) has manufactured and distributed medical products since 1931.

Baxter primarily works with blood and plasma, a business with recession-resistant tendencies. Revenue rose 7% in constant currency in the nine months ended September. However, the company generates about 57% of its revenue overseas, leaving it susceptible to currency fluctuations. Total sales fell 1% including currency effects.

The company benefits from a robust balance sheet, solid operating momentum, and rising earnings estimates. Baxter International is a Long-Term Buy.

Business breakdown

Baxter operates three primary businesses. The BioScience unit (sales of $4.06 billion, or 45% of total revenue in the first nine months of 2009) produces clotting agents for hemophilia and biotech drugs that treat both immune deficiencies and cancer. A portfolio of vaccines shields patients from influenza, smallpox, and Severe Acute Respiratory Syndrome. Other products include blood-processing and storage systems employed by hospitals and blood banks. BioScience is the only segment to post growth in the nine months ended September, with sales climbing 3%.

The medication-delivery business ($3.34 billion, 37%) makes products that fill intravenous infusion pumps and other devices. These include generic injectable drugs used for critical care and other treatments related to anesthesia, pain management, and chemotherapy. The segment faces some pricing pressure from generic competition. The renal division ($1.64 billion, 18%) focuses on dialysis equipment and services for kidney-failure patients.

In October, Baxter gained clearance to market Celvapan — a vaccine for H1N1, or the swine flu — in Europe. To date, the company has received orders for about 80 million doses. Baxter expects the vaccine, prescribed in two doses, to boost December-quarter revenue by at least $30 million. With the disease showing few signs of subsiding, the vaccine could provide a sustainable revenue stream over the next several years.

In the past two years, Baxter has spent 7% of sales on research and development. The company is pursuing therapeutic uses for stem cells, influenza vaccines, and intravenous treatments for Alzheimer’s disease. One new product, an enzyme called Hylenex that helps rehydrate children by making their skin more permeable, could generate $200 million in annual sales.

Conclusion

Baxter trades at 16 times trailing earnings, a 17% discount to the three-year average P/E ratio. The stock trades at least 12% below its three-year average price/sales and price/cash flow ratios. Wall Street estimates have been rising and currently call for per-share-profit growth of 12% in 2009 and 13% in 2010.

Baxter pays a quarterly dividend of $0.26 per share and yields 1.9%. The company has also aggressively repurchased shares, reducing the share count by more than 7% over the last 10 quarters. An annual report for Baxter International Inc. is available at One Baxter Parkway, Deerfield, IL 60015; (847) 948-2000;
www.baxter.com.

BAXTER INTERNATIONAL
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Sep '09 $0.69 vs. $0.66 - 1% $59.13 -

$52.12

18 - 16
Jun '09 0.96 vs. 0.85 - 2% 53.14 - 45.46 16 - 14
Mar '09 0.83 vs. 0.74 - 2% 60.99 - 47.61 19 - 15
Dec '08 0.91 vs.

0.76

+ 4% 69.16 - 47.41 23 - 16
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $12.35 $3.38 $0.91 $71.53
-
$47.41 21 - 14
2007 $11.26 $2.79 $0.72 61.09
-
46.07 22 - 17
2006 $10.38 $2.23 $0.58 48.54
-
35.12 22 - 16
2005 $9.85 $1.52 $0.58 41.07
-
33.08 27 - 22
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
90 82 77 86 76 73 18

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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