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INTRODUCTION

I have been following Baxter International (NYSE:BAX) for some time now. I was very impressed with the dividend growth over the previous years. After the stock reached a new 52-week high, it began to sell off and had been floating around the $66.00 area for a few weeks. I will evaluate BAX and draw upon multiple sources to determine whether this is a good time to buy BAX.

From the Baxter International website we read,

"Baxter International Inc., through its subsidiaries, develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As a global, diversified healthcare company, Baxter applies a unique combination of expertise in medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide."

According to the website Baxter International has expertise for healthcare professionals in anesthesia, biosurgery, critical care, hemophilia, immunoglobulin, pulmonology, renal and vaccines. Regarding patients and caregivers, Baxter International has expertise in Alpha-1 antitrypsin [AAT] deficiency, Hemophilia, Immune Thrombocytopenic Purpura [ITP], Kidney Disease, Primary Immune Deficiency [PID], and Protein C Deficiency. The company offers a wide array of products in these domains.

REASONS TO LIKE BAXTER INTERNATIONAL

I have begun to look at the price history of a company in order to get an idea whether the company's stock price has been steady, increasing, decreasing or remaining range bound. The following charts are from November 15th and show the price change of BAX. This first chart shows the 10-year history of the company's stock price. The stock's lowest price point is $26.21 and its high is $74.60 which it reached this year. That represents an increase in capital appreciation of 184.64%! We can also see that the company's stock price had recovered from the great recession. This gives us an idea that the company's stock price has been steady increasing over time and may continue to do so. There does not appear to any evidence to suggest that it is range bound.

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Chart Source: Questrade

The following chart shows the stock price action YTD. This is not as pretty as the previous chart. On January 2nd, the stock price closed at $67.64. The current stock price is $68.66. Overall, 2013 has not been very kind to BAX's stock price as the YTD appreciation is only 1.51%. As can be seen, the major sell off occurred on September 25th when JPMorgan initiated BAX at Neutral and made comments that the hemophilia drug space is set to get more competitive. I will speak a little more about this later on.

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Chart Source: Questrade

When looking at the recent stock price activity, since its high of $74.60 (the 52-week high), the stock has traded down as low as $62.80 (the 52-week low) which is a decrease of 18.79%. On November 15th, the stock closed at $68.66, which is 9.33% above the 52-week low and is only 8.65% away from the 52-week high. This shows that the stock still has room to catch up and that buying on the dip would have yielded a good return thus far.

This year, BAX's earnings reports have not been poor as shown in the following table.

Date

EPS Estimate

Results

Revenue Estimate

Results

01-24-2013

$1.26

IN LINE

$3.8B

BEATS by $0.08B

04-18-2013

$1.05

IN LINE

$3.45B

MISSES by $0.04B

07-18-2013

$1.16

BEATS by $0.03

$3.67B

MISSES by $0.03B

10-17-2013

$1.19

IN LINE

$3.77

MISSES by $0.05B

What I like from these quarterly earnings reports for this year is that the EPS has either been in line or has beat estimates. Looking at the revenues for the past three recent quarters, although they have all missed the analysts' estimates, they have nonetheless increased each quarter. A more in depth review of some of these results is presented below.

The following chart shows the annual revenue of BAX since before 1994. The chart clearly shows that since 1998, BAX's annual revenue has steadily increased. The growth trendline shows an annual growth of approximately 4.79% and a 5-year growth of 3.86%. It is obvious that growth was slowed in 2009, 2010 and 2011 which is not unexpected given that most companies were recovering from the great recession and budgets were tightened.

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Chart Source: Gurufocus.com

The following chart shows the annual EPS (Diluted) of BAX since 1994. The company experienced a rough period between 1994 and 2005 where the EPS fluctuated greatly. Since 2005 the EPS has, with the exception of 2011, steadily increased. Since 2011, the EPS has since recovered above the 2010 reported EPS and has continued to increase. The 5-year EPS (Diluted) average is 6.58% despite the decrease in 2011. This shows that company is capable of generating profits.

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Chart Source: Gurufocus.com

The following chart shows the annual outstanding shares of BAX since 1994. There are two trends that this chart shows. Between 1994 and 2007, BAX was fairly consistently issuing new shares however, since 2008 to the present, BAX has consistently repurchased their shares and have decreased their outstanding shares to levels that were reported in 1996. The rate of repurchase of these outstanding shares over the past 5 years has been 3.35%. This shows a good thing for investors and that the growth in EPS is not all attributed to share repurchases.

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Chart Source: Gurufocus.com

THE DIVIDEND

On 05-07-2013, BAX declared a $0.49/share quarterly dividend which represented a 9% increase from the prior dividend. The chart below shows the dividends per share of BAX for over 10 years. It is obvious from the chart that BAX became serious about its dividend after 2007 when it began increasing it consistently each year. In fact, it has increased it very well as the 5-year dividend growth is 13.33%. Can this be sustained? The payout ratio over this same time has fluctuated between 27% and 48%. The current payout ratio is sitting at about 37% which suggest that the dividend has room to increase without stressing the company's financials.

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Chart Source: Gurufocus.com

Free cash flow, which is where dividends are generally paid from, is increasing for BAX as shown in the chart below. Despite a stagnated free cash flow growth over the last few years, its 5-year growth is 4.29% and has a growth trendline of 11.47% between 1994 and 2012. This shows that the company continues to generate cash. From this, it can be said that the dividend appears safe in that it can be continued and could very well continue to increase at near the same pace.

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Chart Source: Gurufocus.com

IS THE TIME RIGHT TO BUY?

There are a few things I want to look at which includes what others have mentioned about BAX.

According to MSN Money, BAX's P/E ratio [TTM] is currently 17.37, the forward P/E ratio is 12.93 and the Price to Cash Flow [P/CF] ratio is about 12.47. According to Gurufocus.com, BAX's P/E and P/B ratios are close to a 1-year lows. The current P/E ratio is not outrageous and could still be considered a relative value given the current market however the forward P/E is quite desirable. The P/CF shows that it is not a value stock but it is not greatly overvalued either.

In Peter Lynch's book "One Up on Wall Street", he described a chart to valuate stocks. As described on Gurufocus.com, "In this chart, Peter Lynch drew the stock prices on the right axis, and the earnings on the left axis. The charts are in logarithmic scale. He aligned the value of $1 in earnings per share to $15 in stock prices. Therefore, if we draw in stock prices, the 'earnings line' he mentioned above is equal to the stock prices at a P/E ratio of 15. According to Peter Lynch, the best buying time will be when the green line (price) is lower than the blue line (earnings line)." The Peter Lynch chart for BAX is presented below. As we can see as of November 15th, the green line is above the Peter Lynch earnings line. So according to this analysis, BAX is overpriced.

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Chart Source: Gurufocus.com

However, there is something to consider. BAX has been increasing its dividend annually now for 7 years. The next chart presents the dividend yield over the past 15 years. The chart clearly shows that the last time BAX's dividend yield reached around 3% was back in 2003. Only a few weeks ago did it once again break above 3%. As the green indicator on the chart states, "Baxter International Inc. stock dividend yield is close to 10-year high". That is not something insignificant. It is a rare occasion.

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Chart Source: Gurufocus.com

There are two stock research services that I follow closely. These services provide ideas on when a good time is to buy. Valuentum in their article on October 25th stated that they liked the company's dividend and offered a fair value range of $47.00-$78.00. They have since increased their fair value range. Parsimony Investment Research on October 2nd included an analysis of BAX in this article. In that article, they suggested that their buy zone was between $63.00 and $67.00.

According to the Discount Cash Flow calculator on Gurufocus.com, BAX's fair value is evaluated at $98.59, which represents a 43.59% upside with a margin of safety of 30%.

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Furthermore, on November 18th Credit Suisse upgraded BAX to outperform from Neutral due to the company's pacritinib deal with Cell Therapeutics (NASDAQ:CTIC). Credit Suisse increased its price target from $73.00 to $80.00 suggesting even here a 16.52% upside. There have been concerns over the past several months that BAX's margins could begin to be affected due to competition in the hemophilia market. Biogen (NASDAQ:BIIB) is waiting for an FDA approval on its long-lasting factor VIII therapy Eloctate. This kind of news contributed to the sell off on September 25th. However, here is why I feel that this sell off was an overreaction. Can BAX adapt to the competition? I believe it can and I believe it is. It has the free cash flow necessary to invest in R&D. The following chart, taken from BAX's website, shows that BAX is committed to its R&D program. The increase in R&D from 2011 to 2012 was 22.20% and this was during a time in which the dividend also increased 23.62%. The real caution may be whether BAX in the future feels that the competition is truly impacting margins and needs to increase R&D which may come at the expense of proportion of dividend increases. In the case of BIIB product pending approval, BAX also has its own long-lasting rFVIII trail underway so it is not as if BAX will allow BIIB to impact the company's profits.

In addition, according to the 2012 annual financial report, the net sales as a percentage of consolidated net for the company's Plasma Protein products were 10%. This 10% includes all products, not only the long-lasting Factor VIII products for hemophilia. Even if BIIB did release this product, it would not significantly affect the overall profits of BAX, but would have some impact in one product line among many. However, this impact has not happened yet and it may not happen as the approval is still pending.

CONCLUSION

After reviewing what other including analysts and stock research services have said regarding BAX, it can be summarized that the recent sell off in Baxter International has provided an excellent buying opportunity. BAX is a company that generates cash and invests it through R&D and returning profits to shareholders via the dividend and share buybacks. The dividend is growing very nicely and appears to be sustainable for several years ahead. There appears to be much upside potential in the stock which would over the long term reward shareholders nicely.

This article did not cover all aspects of the stock and should not be construed as a recommendation from the author to buy this stock. Investors should perform their own research and compare the stock with their own investing goals and plans. The author did initiate a position for the first time in BAX with the recent dip and is now long BAX.

Source: Has A Buying Opportunity In Baxter International Occurred?