Is Baxter International a Value Investment?

| About: Baxter International (BAX)

Baxter International Inc. (NYSE:BAX) (Baxter) 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.

Baxter manufactures products in 27 countries and sells them in more than 100 countries. The Company operates in three segments: BioScience, Medication Delivery and Renal. Baxter generates approximately 60% of its revenues outside the United States, and maintains manufacturing and distribution facilities in a number of locations in the United States, Europe, Canada, Asia-Pacific and Latin America. In August 2009, the Company acquired certain assets of Edwards Lifesciences Corporation related to the hemofiltration business, also known as Continuous Renal Replacement Therapy (Edwards CRRT).

fyi Last Price 46.29
52 Week High 61.88
52 Week Low 44.59

Does BAX make for an intelligent investment or intelligent speculation today?

Starting with a base estimate of annual Free Cash Flow at a value of approximately $1,500,000,000 and the number of shares outstanding at 601,000,000 shares; we used an assumed FCF annual growth of 12 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here.

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $54.36.

Market Price = $46.29
Intrinsic Value = $54.36 (estimated)
Debt/Equity ratio = 0

Price To Value (P/V) ratio = .85 and the estimated bargain = 15. percent.

Before we make a purchase, we must decide ( filter #1 ) if BAX is a high quality business with good economics. Does BAX have ( filter #2 ) enduring competitive advantages, and does BAX have ( filter #3 ) honest and able management.

The current price / earnings ratio = 12.5
Its current return on capital = 18.28
Using a debt to equity ratio of 0 , BAX shows a 5-year average return on equity = 28.4

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does BAX make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of a mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is BAX the best place to invest our money today?


How will BAX compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of 0, BAX shows a 5-year average return on equity = 28.4 . Based on a holding and compounding period of 10 years, a purchase price bargain of 15. percent, and a relative FCF growth of 12 percent, the estimated effective annual yield on this investment may be greater than 13.6 %.

Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?As always, I appreciate hearing your views.

Disclosure: no positions