Baxter International Inc.: Worth A Look

| About: Baxter International (BAX)

Baxter International Inc (NYSE:BAX) is a global diversified healthcare company offering a broad range of products in the fields of medical devices, pharmaceuticals as well as biotechnology. Products on offer include those that help people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and others. Baxter has manufacturing facilities in 27 countries and sells to more than 100 countries.

Recent Performance:

EPS has grown from $1.26 in 2002 to $3.88 in 2011, representing a rate of 12% compounded. Normalized EPS was $1.67 in 2002 so normalized growth has been quite a bit less. Over the past 5 years EPS growth as well as normalized EPS growth has been 13%.

Free Cash Flow for the past 10 years has totaled $13.5bn which matches up well with total earnings over the same period of $13.9bn. Baxter Management have put the company's strong cashflow generation to work through re-purchasing a net of $7.5bn worth of its own shares, and distributing a further $5bn to shareholders in the form of dividends over the past 10 years.

Dividend per share has grown from $0.58 in 2002 to $1.27 in 2011 giving a growth rate of about 8%, but over the past 5 years dividends have grown at an attractive 17%.

Net debt to equity in 2002 and 2003 was particularly high at over 100%, but since 2008 net debt has remained at zero. Currently Baxter has almost $3bn in cash and cash equivalents, and only $256m in debt, providing a very strong balance sheet.

Quality Rating:

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Baxter scores a strong QR, scoring well in all criteria. Its EPS growth and return on retained earnings are not as good as those of many small cap growth stocks, but given the size of the company scores of 4 in these 2 criteria does not pose a great concern.

Intrinsic Value:

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Intrinsic Value is forecast to rise meaningfully in the coming years, and though the share-price has appreciated significantly over the past few months, an attractive Margin of Safety is currently still on offer.

BAX IV Graph
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Baxter's extraordinary performance in 2011 catapulted its Intrinsic Value, and forecasts for the coming years are very positive also. Over the past 10 years few buying opportunities have existed - the market has typically valued BAX higher than its intrinsic worth. With the performance of BAX really starting to hit its straps now, an attractive Margin of Safety has all of a sudden presented itself.

Investment Grade Table:

BAX Inv Gr Table
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With a Margin of Safety of 14 and a Quality Rating of 68, Baxter achieves an Investment Grade Score of 10 which places it at number 113 on the Investment Grade Table. Companies like Baxter, which are closely monitored by analysts and pay a meaningful dividend, rarely offer a substantial Margin of Safety (as the above graph illustrates).

Drivers of Future Growth:

Baxter, even though it is already large, still has extraordinary scope for growth as a result of the emergence of high population developing countries. The company, which is a leader in a number of the markets in which it operates, sells its products to around 100 countries. That begs the question - what do the other 100 countries do to save and sustain lives of people with hemophilia, kidney disease and other complex acute and chronic medical conditions? The probable answer is they provide substandard treatment to sufferers. Though Baxter may never serve all 206 countries of the world, it will certainly continue to expand into new countries each year for the foreseeable future. Currently the US makes up around 40% of the company's revenues - in other words, 95.5% of the world's population provides only 60% of revenues. So long as Baxter remains at the forefront of innovation which it has done for many years, the scope for growth internationally is substantial.

The below 2 graphics provide a brief snapshot of Baxter's research and development initiatives:

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Even in the U.S., Baxter should be expected to earn a reasonable growth rate for a long time to come due to the aging population and the growing market that will provide.


Baxter looks to be a reasonably good opportunity at current prices. A handy 2.3% dividend yield is currently on offer, and the dividend per share has grown at 17% over the past 5 years. Plus the 2011 payout ratio was a very sustainable 33%. The company's cashflow and balance sheet are formidable, positioning the company well to take advantage of all opportunities that come its way - be it acquisitions, expansions, and the development of new products.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAX over the next 72 hours.