Baxter International May 2014 Quarterly Valuation $BAX

500px-Baxter.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Lowest PEmg Companies for Enterprising Investors.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Baxter International (BAX) fares in the ModernGraham valuation model.

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.

BAX Chart

BAX data by YCharts

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

Key Data:

Recent Price $74.57
MG Value $91.86
MG Opinion Fairly Valued
Value Based on 3% Growth $60.49
Value Based on 0% Growth $35.46
Market Implied Growth Rate 4.69%
Net Current Asset Value (NCAV) -$13.28
PEmg 17.87
Current Ratio 1.66
PB Ratio 4.66

Balance Sheet – 3/31/2014

Current Assets $9,388,000,000
Current Liabilities $5,645,000,000
Total Debt $7,517,000,000
Total Assets $25,261,000,000
Intangible Assets $6,495,000,000
Total Liabilities $16,590,000,000
Outstanding Shares 542,440,000

Earnings Per Share

2014 (estimate) $5.05
2013 $3.66
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

Earnings Per Share – ModernGraham

2014 (estimate) $4.17
2013 $3.67
2012 $3.60
2011 $3.24
2010 $2.88
2009 $2.95

Dividend History

BAX Dividend Chart

BAX Dividend data by YCharts

Conclusion:

Baxter International qualifies for Enterprising Investors but not for Defensive Investors.  The Defensive Investor has concerns with the low current ratio and the high PB ratio, but the Enterprising Investor’s only concern is the high level of debt relative to the current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Covidien plc (COV) and ModernGraham’s valuation of Cardinal Health (CAH).  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.88 in 2010 to an estimated $4.17 for 2014.  This level of demonstrated growth is in line with the market’s implied estimate of 4.69% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Baxter International (BAX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Be sure to review the previous ModernGraham Valuations of Baxter International (BAX)!

Disclaimer:  The author did not hold a position in Baxter International (BAX) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.


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