Is Baxter A Bargain? Management Seems To Think So

Aug.28.12 | About: Baxter International (BAX)

Last month Baxter (BAX) authorized the repurchasing of another $2 billion of its company stock. Which means, adding in Baxter's earlier announcement of repurchasing $2.5 billion, it intends to repurchase a total $4.5 billion of their own stock. Is Baxter that great of a bargain compared to other healthcare companies? Last month Baxter beat estimates slightly by reporting net income of $661 million in the second quarter, an increase of 7% compared to $615 million reported in the same period last year. For the quarter worldwide sales totaled $3.6 billion, with their Bio-Science revenues of $1.6 billion, and their medical products at $2 billion, each representing a 1% increase. If the impact of foreign currency is excluded, the sales increase would be 4%. US sales were up 6% to $1.5 billion, while international sales slowed to $2.1 billion or down 2%, excluding foreign currency, which would have shown an increase of 3%. Baxter expects sales to continue with a growth, again excluding foreign exchange, of 4 to 5%. Year to date Baxter has seen their stock yo yo from a low of $49.61 to a high of $60.27. Since its mid June low of $49 the stock has worked upward to the high $50 range, though it has not broken through $60 since mid-April.

As a large cap healthcare company Baxter has had some misfires, but being a large diversified company it was able to absorb the hits without affecting their stock as opposed to a smaller less diversified company. One recent example is with its investigational drug HYQ developed along with Halozyme Therapeutics Inc. (NASDAQ:HALO). HYQ targets primary immunodeficiency disorders that weaken the immune system allowing repeated infections and other health problems to occur more easily. On Aug. 1, Baxter announced that they received a complete response letter from the FDA announcing that it was delaying the approval of HYQ, seeking additional preclinical data focusing on issues related to non-neutralizing antibodies and the possible effects they have on reproduction, development and fertility. Baxter barely hiccuped, moving down slightly only to recover shortly thereafter. While their partner on the HYQ, Halozyme, a small cap company with a market cap of $645.73 million, dropped off the cliff losing 50% of its value in one day, and has yet to recover. However, if the FDA would have given a favorable response Halozyme, a far more volatile stock, most probably would have been driven upward at a much higher percentage than Baxter, giving investors in Halozyme a much bigger bang for their buck.

So is Baxter a bargain compared to other large cap healthcare companies? While Johnson and Johnson (JNJ), and Pfizer (PFE) announced disappointing results of their Alzheimers drug, Baxter's drug Gammagard has had positive results in their clinical trial. Four patients who received the highest doses in trials showed no decline in memory or thinking skills. Of course, that's too small of a sample to predict success at this point. But the results wowed experts attending a global industry meeting last month. Baxter intends to test Gammagard on 400 patients and have the results within a year. If Gammagard works as many believe it will, it could be huge. Glenn Novarro, an analyst for RBC Capital Markets, commented on Gammagard, "an unequivocally positive result in the next Gammagard study may create a potential market worth $7.2 billion in the U.S. alone by 2017." Johnson and Johnson has a market cap of $186 billion with a PE of 21.5, and is near its 52 week high of $69.75, while Pfizer has a market cap of $179 billion with a PE of 20.85, and is also closing in on its 52 week high of $24.49.

The healthcare sector as a whole has a PE 22.34 with a ROE of 15.37, and a P/B of 16.05. Baxter, with a PE of 14.45, and a ROE at 33.18, and a P/B of 4.51 is beating the sector. But how does it compare to other companies closer to its size that compete in the same arena such as Medtronics Inc. (MDT), Covidien Plc (COV), or CareFusion Copr. (CFN)? All four companies have an extensive pipeline of products on the market or in various phases of testing.

Medtronics has had some positive news as of late, not only has the company revised its stock price estimate up 15% to $45 a share, Monday it announced, at the 2012 European Society of Cardiology Congress, positive results of their landmark clinical trial for PROJECT, confirming the long term safety of drug eluding stents in the treatment of coronary artery disease. Days earlier the company also announced that results of its Symplicity HTN-2 showed its renal denervation system provided superior and sustained blood pressure reduction in patients with treatment-resistant hypertension. The 18 month study showed no device-related serious adverse events and no newly reported vascular complications. The $41.6 billion market cap company's net earnings rose 5% to $864 million, in line with analysts' expectations. Since the beginning of the year Medtronics' stock seemed to be in a holding pattern trading in the mid to upper thirties, but in early August it broke through the $40 dollar barrier for the first time since early February and continues to trade above $40. Medtronics has a low PE of 12.35 compared to its competitors, and just might be the bargain of the group.

Covidien plc. has had its share of setbacks with a number of product recalls, including a voluntary recall of Duet TRS, its key endomechanical product. Covidien had already sold over 500,000 units and roughly generated over $50 million dollars from Duet TRS - a segment single-use tissue reinforcement system, which it had stopped manufacturing after a report that indicated the device caused post-operative abdominal injuries. Covidien expects that the loss of the product line along with its associated recall and other costs will offset earnings per share from continuing operations for fiscal 2012 by several cents and fiscal 2013 by 5 to 10 cents. Covidien has a market cap of $26.7 billion and a PE of 14.3 and a P/B of 2.49

CareFusion Copr. (CFN) has had its own product recalls as of late as it announced its fourth recall in three months, a Class 1 voluntary recall of its Alaris Pump Module, Model 8100 due to a latent risk which might cause the door keypad overlay of the pump module to separate from the keypad assembly. It was seen to be a flaw which could lead to detrimental and fatal consequences. The recalled lot was manufactured between October 2011 and February 2012. A Class 1 recall is specified as the recall of a product having a considerable probability of serious adverse health or fatal consequences associated with the use of defective units. CareFusion reported fourth quarter adjusted earnings from continuing operations of $0.51 per share compared to $0.52 per share last year. Full year for 2013 EPS is expected to be between $2.11 and $2.21, compared to the consensus estimate of $1.98. Carefusion has a PE 19.66, a ROE 7.21, and a P/B of 1.11.

Baxter, along with its rivals Medtronics, Covidien, and CareFusion are all solid profitable companies. But the question is, as an investor, which one would give the best bang for the buck. Does Baxter announcing that they are repurchasing 2 billion dollars of their own stock signal that it believes its stock is poised to outperform others in their sector? That time will tell. But looking at the company's cash flow, Baxter is sitting on a war chest of cash & equivalents of 2.3 billion, while Covidien sits on 1.7 billion followed by CareFusion at 1.4 billion, and Medtronics at 1.06 billion. Clearly Baxter is sitting on a sizable amount of cash, and there are only a handful of options a company can do with its excess cash: It can acquire other companies, expand operations, pay out dividends, or buy back shares.

With Baxter buying back shares of their stock, the question remains is Baxter unable to find other productive places to invest their money or are they buying back their own stock because they believe that the stock is undervalued, and buying back shares is the most prudent investment with their cash on hand. One must remember when a company buys back it own shares, earnings per share tend to move upward given that the number of available shares have been reduced. Perhaps the reason for the buy back can be found in Baxter's CFO's Robert Hombach's comments:

Baxter remains committed to a disciplined capital allocation strategy, which includes returning value to shareholders through both dividends and share repurchases. With our strong balance sheet and sustained ability to generate significant cash flow, our company continues to have flexibility to invest in opportunities that will enhance long-term growth and create value for our shareholders.

While all the major companies mentioned in this article are, in my opinion, good long term investments, there seems to be two that are primed for a much stronger upward movement, Medtronics and Baxter. However, I would give the edge to Baxter for its "putting their money where their mouth is," philosophy. If comments by Baxter CEO Robert Parkinson last month are any indication of the direction he sees his company moving then Baxter perhaps may just be at a bargain price. '

We remain confident that the focus on our diversified portfolio of critical therapies and innovation will position us well for future growth…we will continue to invest in our new product pipeline and seek complementary business development opportunities that will enhance our global presence, [and] expand access to care.

Clearly, Baxter has great faith in their pipeline of products, positive earnings, and low PE ratio that they see their company and their stock moving in an upward direction, and so do I.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.