Seeking Value? Look At Baxter

8/2/2010


  Recent Price
$45
  Dividend
$1.16
  Yield

2.6%

  P/E Ratio
12
  Shares (millions)
596
  Long-Term Debt as % of Capital
38%
  52-Week Price Range
$61.88 - $40.25

While investors understand intellectually the benefits of buying low, it can be tough to pull the trigger. Consider Baxter International ($45; BAX).

The stock is down 24% since issuing disappointing profit guidance in April. Baxter surprised Wall Street by blaming weakness on plasma-based products — a market niche that was supposed to drive growth — and government-mandated drug rebates. Since then, product recalls have kept pressure on the stock price.

Baxter shares are down at least in part on legitimate bad news, and avoiding such trouble is a natural human response. But if a company’s problems are transitory and its growth story intact, the midst of a slump can be a fine time to buy in. Baxter, a Long-Term Buy, seems capable of double-digit annual profit growth over the next five years, operating strength not reflected in the current valuation.

Big discount

Over the last five years, Baxter averaged a 15% discount to the average health-care-equipment company in the S&P 500 Index based on trailing P/E. However, the current P/E ratio of 12 is near its lowest level in five years, and the stock trades at a 31% discount to its peer-group average.

Baxter also trades at a discount of at least 20% to its own five-year average for price/earnings, price/sales, and price/cash flow. Those valuation ratios suggest Baxter shares have a lot of room to rebound. Even a modest jolt of good news could revitalize the stock.

The shares have risen 7% since announcing June-quarter earnings of $0.93 per share excluding special items, down 3% and a penny above the consensus. Sales rose 2% and were flat in constant currency, as 9% growth at the medical-delivery unit offset declines at the plasma business. The quarter was by no means a blowout, yet the news was better than expected, and the stock responded.

Looking ahead

In the wake of recent gains, here are three reasons to be excited about future price action.

Low expectations. The consensus projects growth of 3% in sales and per-share profits this year. Baxter set its bar pretty low, and the company seems capable of exceeding those targets. Wall Street expects per-share profits of $3.93 this year, and on July 22, Baxter projected $3.93 to $3.98. Baxter does not need 25% profit growth to spark share-price gains.

Regulatory strictures. Baxter lowered profit-margin guidance in April, citing the effects of health-reform legislation. Rivals have not been so pessimistic, suggesting Baxter’s projections may prove overly cautious.

Plasma developments. Baxter has seen a recession-induced decline in demand for its premium products. However, a stronger economy and new products should restore growth by 2011.

Baxter shares yield 2.6%, offering some compensation to investors willing to wait for further gains in operating momentum. The dividend has risen at an annualized rate of 26% over the last three years but still represents just 30% of trailing earnings. An annual report for Baxter International Inc. can be obtained at 1 Baxter Parkway, Deerfield, IL 60015; (847) 948-2000, www.baxter.com.

BAXTER
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '10 $0.93 vs. $0.96 + 2% $59.95 -

$40.34

15 - 10
Mar '10 0.93 vs. 0.83 + 11% 61.88 - 55.29 16 - 15
Dec '09 1.03 vs. 0.91 + 11% 59.74 - 53.50 16 - 15
Sep '09 0.98 vs.

0.88

0% 59.13 - 52.12 17 - 15
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $12.56 $3.80 $1.07 $60.99
-
$45.46 16 - 12
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
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
78 41 82 88 85 27 12

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


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