From its 1931 inception, Baxter International (BAX) has undertaken to alleviate numerous human ailments from within. It is not long into a research undertaking on this company before one grapples with such phrases and expressions as "recombinant factor VII," "subcutaenous therapy" and "peritoneal dialysis." Although its $33-odd billion market capitalization earns BAX its rightful place inside most any healthcare fund or ETF, this is not a pharmaceutical business dispensing pain killers, or even such popular "necessities" as Viagra.
The devices introduced by BAX into surgical wards and clinics have not always delivered universal satisfaction and acclaim. A disconcerting recent decade-long pattern of product failures and recalls was underscored during the opening quarter of 2010, during which the company booked close to $1 a share (pre-tax) in charges stemming from an enforced market removal of one of its fusion pumps.
Some company supporters (and stock holders) argue that a recent year senior management reorientation is calculated to reduce future odds of such unfavorable developments. To that end appropriate incentives seem firmly in place.
While the following is by no means unprecedented, nor is it especially commonplace, each and every Baxter officer holds a minumum of three times annual salary in the company's common shares. In addition, some needed balance sheet adjustments were implemented as 2010 unfolded -- enough to prompt credit rating increases from among those agencies ever on the alert for such things. Excluding dividend payments, Free Cash Flow rolled in last year at close to $2.50 a share, and figures to scrape $3.00 when 2011 numbers are totalled up.
This year's consensus per share after-tax earning estimates center on $4.25, in its turn putting in a 13.5 multiple. That could easily prove decisive and rewarding to the longs, as BAX's five year median absolute forward P/E is close to 17. Put another way, today's investor enters at least at an historical discount. Not in itself a guarantee, but always and everywhere the lone guarantee in common stock market investing is that there are no guarantees. Hopes are pinned at least in part on some production and operating efficiencies intended to flow from another accounting charge, this one taken late in 2010. Split roughly in half between cost of goods and administrative outlays, $257 million were assigned to contract terminations and discontinued product lines. The overall intent is to bolster after-tax earnings by roughly 15 cents per share, mostly in 2011 with a few pennies left in waiting for next year.
A dose of financial engineering is also in force: Common expectations call for a roughly $1 billion share repurchase this year alone, at existing prices no less than 3% of the total. The company's treasury will only then be rounding into mid season form; an additional $1.8 billion in authorizations will continue to occupy the department's attention.
Business risks percolate in ways by now familiar throughout U.S. and world healthcare markets. Elective surgeries are down, surgical techniques have evolved in ways demanding fewer internal delivery systems, and governmental intrusions, controls and costs will at least not, in the immediate term, evaporate. While Baxter's fastest growing markets are found in the BRICs, it remains a fairly small share of top line, as the U.S. and Europe now combine for close to 75 cents on the revenue dollar.
The stock changes hands today at a little above its 50-day MA and more noticeably over the 200-day, but technicians are nonetheless able to spot some appeal. When lined up over the recent 24 months against any of Novo-Nordisk ADR (NVO), Hospira (HSP), and some market index or the Healthcare SPDR (XLV), Baxter common lies at the bottom of the scales. Best guess is that the current $1.24 annual dividend (yield 2.2-2.25%) will see a marked slowdown in near-term growth; the fact also remains that earnings and cash flows should securely cover it.
To the longs, stay with it, leaving your next decision point to prices ranging between 64 and 67. To those not involved and who might be feeling apprehensive about a group underweight, patience is the moment's appealing virtue. A price retreat to a zone marked $48-50 is considered plausible and, if attained and acted upon, will bolster any investor's confidence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.