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Here is a look at how Baxter International (NYSE:BAX) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least one-third over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$70
MG OpinionFairly Valued
Value Based on 3% Growth$56
Value Based on 0% Growth$33
Market Implied Growth Rate4.56%
Net Current Asset Value (NCAV)-$14.55
PEmg17.62
Current Ratio1.92
PB Ratio4.79

Balance Sheet - 9/30/2013

Current Assets$9,597,000,000
Current Liabilities$4,996,000,000
Total Debt$8,652,000,000
Total Assets$25,250,000,000
Intangible Assets$6,462,000,000
Total Liabilities$17,501,000,000
Outstanding Shares543,050,000

Earnings Per Share - Diluted

2013 (estimate)$4.30
2012$4.18
2011$3.88
2010$2.39
2009$3.59
2008$3.16
2007$2.61
2006$2.13
2005$1.52
2004$0.62
2003$1.52
2002$1.74

Earnings Per Share - Modern Graham

2013 (estimate)$3.88
2012$3.60
2011$3.24
2010$2.88
2009$2.95
2008$2.42

Conclusion:

Baxter International is an intriguing company for enterprising investors. The company has fairly strong financials, stable earnings and healthy growth. However, the company just barely fails the tests for the defensive investor, who is not willing to take on as much time for research as his enterprising investor cohort. The company's current ratio is slightly above the threshold for the defensive investor, and the price to book ratio is far too high for the defensive investor. From a valuation perspective, the company appears fairly valued after growing EPSmg (normalized earnings) from $2.42 in 2008 to an estimated $3.88 for 2013. Such growth is in line with the 4.56% growth implied by the market at this time. As a result, enterprising investors should feel comfortable doing further research to determine whether Baxter International is suitable for their individual portfolio, while keeping in mind the 7 Key Tips to Value Investing.

Disclaimer: The author did not hold a position in Baxter International at the time of publication and had no intention of entering into a position in the next 72 hours.

Source: ModernGraham Valuation Of Baxter International