Baxter International: A Spin-Off Play And An Increasing Dividend

| About: Baxter International (BAX)


The company plans to split into two companies by mid-2015 to enhance shareholder value.

The company is a leader in most markets that it participates in.

The company has a recent history of yearly dividend increases to reward investors.

Baxter International (NYSE:BAX) is a company that is entering an exciting period. After acquiring some businesses and divesting others over recent years, the company has decided to split into two separate companies. The company currently yields about 2.8 percent and has a recent history of yearly dividend increases. While no stock should be considered a "safe stock" without any risk, BAX shares are relatively safe in comparison to many high profile stocks and should be strongly considered as a building block of any long-term investors' portfolio. With the split of BAX into 2 companies approaching in mid-2015, investors will be able to hold shares in 2 high-quality companies.


BAX makes and distributes medical products and equipment, with a focus on the blood and circulatory system. Sales in the U.S. represent about 42 percent of 2013 sales, Europe represent about 30 percent, Asia-Pacific represent about 15 percent, and Latin America and Canada represent about 12.0 percent of sales.

The company's biosciences division (43 percent of 2013 sales) produces plasma-based and recombinant clotting factors for hemophilia, as well as biopharmaceuticals for immune deficiencies and cancer. The company offers biosurgery products for hemostasis, tissue sealing and tissue regeneration, vaccines, and blood processing and storage systems. The most important product of this division is Advate, a recombinant blood-clotting agent. The medical products division (37 percent of 2013 sales) makes IV solutions and various specialty products such as intravenous solutions, premixed drugs, pre-filled vials and syringes, IV nutrition products, and inhalation anesthetics. The renal care division (20 percent of 2013 sales) makes dialysis equipment and other products and services provided for kidney failure patients. In September 2013, the company acquired for this division Gambro AB, a Swedish maker of dialysis products with indicated sales of about $1.6 billion, for about $4 billion in cash and debt.

Second quarter earnings

BAX announced earnings of a 5 percent rise in adjusted net earnings to $692 million or $1.26 as compared to 2014 second quarter earnings of $659 million or $1.20 per share. The earnings exceeded BAX's previous earnings estimates of $1.18 to $1.22 for the quarter. The bioscience division revenues increased 6.9 percent to $1.751 billion in the quarter. The increase was attributable to strong growth in all the global franchises, particularly double-digit growth of ADVATE [Antihemophilic Factor (Recombinant), Plasma/Albumin-Free Method] and albumin, as well as higher global demand for GAMMAGARD LIQUID [Immune Globulin Intravenous (Human)], biosurgery products and select vaccines.
The revenues from the medical products division rose 23.7 percent to $2.513 billion. The increase was driven by sales of injectable drugs, anesthetics and nutritional therapies. (Excluding contributions from the company's Gambro acquisition, revenues from the division increased 4 percent in the quarter.)

BAX expects revenues to grow between 12 percent and 13 percent in the 2014 third quarter. The company also expects adjusted earnings in the range of $1.28 to $1.32 per share for the quarter. For full year 2014, BAX expects increased revenue growth of 10 percent to 11 percent compared with the prior view of 9 percent to 10 percent.
BAX, however, narrowed their adjusted earnings per share guidance to $5.10 to $5.20 from the earlier range of $5.05 and $5.25.

The upcoming spin-off in 2015

In March 2014, BAX announced that the company would split into two independent entities. The first company will be the biopharmaceuticals/bioscience division, which includes recombinant and plasma-based proteins to treat hemophilia and other bleeding disorders; plasma-based therapies to treat immune deficiencies, and other chronic and acute blood-related conditions. This division contributed $6.6 billion or 43 percent of overall BAX revenues in 2013. The second company will be the medical products division, which manufactures intravenous solutions and administration sets, premixed drugs and drug-reconstitution systems, pre-filled vials and syringes for injectable drugs, IV nutrition products, infusion pumps, and inhalation anesthetics.
This division contributed $8.7 billion or 57 percent of overall BAX revenues in 2013. The transaction will be a tax-free distribution to BAX shareholders of a new publicly traded stock in the new biopharmaceuticals company. The company expects the transaction to be completed by mid-year 2015.

Within days of BAX's split-up announcement, the company's shares rose to a 52-week high above $75 as analysts approved of the split of the company into two.

Competitors and the industry risks

BAX is a leader in many of their most important markets. The company, however, must compete with significant competitors such as Bayer AG (OTCPK:BAYRY), Wyeth (owned by Pfizer, Inc. (NYSE:PFE), Biogen Idec (NASDAQ:BIIB) and Novo Nordisk (NYSE:NVO). In the company's medication delivery division, it expects increased pricing pressure from generic competition for injectable drugs and from group purchasing organizations. The company must also compete with generic forms of Rocephin antibiotic and propofol anesthetic agent. In the company's renal care division, global and regional competitors continue to expand their manufacturing capacity for peritoneal dialysis products.

The industry that BAX competes in tends to perform relatively well in bear markets, but less so in markets in a stronger economy. The principle growth drivers for the industry are: 1) the increasing age of the population as the total elderly population has grown significantly; and 2) the growing demand by patients and doctors for improved technology and better health care equipment. Although these two factors are powerful positives for the industry, there are concerns that federal budget reductions would negatively affect those companies receiving some form of federal funding. The Affordable Care Act, however, will add more patients with health insurance that could increase the customer base for the industry.

Research and development

BAX spent $1.25 billion for research and development in 2013 (about 8 percent of revenues). The primary areas of the company's research and development include recombinant therapeutics, plasma-based therapeutics, biosurgery products, small molecule drugs, enhanced packaging systems for medication delivery, kidney dialysis, drug formulation technologies, and sterilization technologies. Clinical trials are studying therapeutic uses for stem cells, intravenous immunoglobulin for Alzheimer's disease, influenza vaccines and other therapeutic agents.

Analysts' views and our views

Given BAX is splitting into 2 companies, such news is central to analysts' opinions on BAX. Generally, analysts believe that the split into two companies makes sense as the company's two units have different profiles: 1) the medical devices division is more defensive and slow growing in nature; and 2) the biopharmaceuticals division is more growth oriented but carries more risk. Analysts believe that each company will likely benefit from their respective dominance, as two-thirds of BAX's current revenue comes from products that are leaders in their markets. Analysts also believe that, despite intense competition in the important hemophilia market, BAX's history of effective therapies, plus new product launches, will enable the company to retain their lead position in that market. With the company's upcoming split in mind, analysts have a one-year price target of $85 to $90 for the shares.

We agree with analysts. We own shares of BAX and believe that the upcoming split will create more value for BAX shareholders as the company has had a successful history of spin-offs. The company's shares have a price to earnings ratio of 20 and yield about 2.8 percent. Based on analysts' consensus 2015 earnings estimates of $5.41, BAX's forward price to earnings ratio is 13.6. With the overall markets at or near their highs, we believe that investors wait for the shares to move into the range of $70.5 to $72.5 (a price to earnings ratio ranging from 13 to 13.4) before establishing a full position. Otherwise, we agree with analysts that a price target range of $85 to $90 is possible as the date for splitting the company into two companies draws near.

Disclosure: The author is long BAX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.