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ModernGraham Valuation: Baxter International (BAX)

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Company Profile (obtained from Google Finance): Baxter International Inc. (Baxter,) is a global, diversified healthcare company. 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. The Company operated in two segments: BioScience and Medication Delivery. It is engaged in the medical devices, pharmaceuticals and biotechnology to create products that advance patient care worldwide. These products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, clinical and medical research laboratories, and by patients at home under physician supervision. Baxter manufactures products in 27 countries and sells the products in more than 100 countries. In September 2013, Baxter International Inc completed the acquisition of Gambro AB.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $70
MG Opinion Fairly Valued
Value Based on 3% Growth $56
Value Based on 0% Growth $33
Market Implied Growth Rate 4.56%
Net Current Asset Value (NCAV) -$14.55
PEmg 17.62
Current Ratio 1.92
PB Ratio 4.79

Balance Sheet – 9/30/2013 

Current Assets $9,597,000,000
Current Liabilities $4,996,000,000
Total Debt $8,652,000,000
Total Assets $25,250,000,000
Intangible Assets $6,462,000,000
Total Liabilities $17,501,000,000
Outstanding Shares 543,050,000

Earnings Per Share – Diluted

2013 (estimate) $4.30
2012 $4.18
2011 $3.88
2010 $2.39
2009 $3.59
2008 $3.16
2007 $2.61
2006 $2.13
2005 $1.52
2004 $0.62
2003 $1.52
2002 $1.74

Earnings Per Share – Modern Graham

2013 (estimate) $3.88
2012 $3.60
2011 $3.24
2010 $2.88
2009 $2.95
2008 $2.42

Conclusion:

Baxter International is an intriguing company for Enterprising Investors.  The company has fairly strong financials, stable earnings, and healthy growth.  However, the company just barely fails the tests for the Defensive Investor, who is not willing to take on as much time for research as his Enterprising Investor cohort.  The company’s current ratio is slightly above the threshold for the Defensive Investor, and the price to book ratio is far too high for the Defensive Investor.  From a valuation perspective, the company appears fairly valued after growing EPSmg (normalized earnings) from $2.42 in 2008 to an estimated $3.88 for 2013.  Such growth is in line with the 4.56% growth implied by the market at this time.  As a result, Enterprising Investors should feel comfortable doing further research to determine whether Baxter International is suitable for their individual portfolio, while keeping in mind the 7 Key Tips to Value Investing.

What do you think?  Is Baxter International fairly valued?  Is the company suitable for only Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Baxter International at the time of publication and had no intention of entering into a position in the next 72 hours.

Photo Credit:  Andrew Magill

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