Medical Stocks

Baxter International Inc Valuation – May 2018 $BAX

Company Profile (excerpt from Reuters): Baxter International Inc., incorporated on October 19, 1931, through its subsidiaries, provides a portfolio of essential renal and hospital products, including acute and chronic dialysis; sterile intravenous (IV) solutions; infusion systems and devices; parenteral nutrition therapies; premixed and oncolytic injectables; biosurgery products and anesthetics; drug reconstitution systems, and pharmacy automation, software and services. The Company operates through two segments: Hospital Products and Renal. The Company’s products are used by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices and by patients at home under physician supervision. As of December 31, 2016, the Company manufactured products in over 20 countries and sold them in over 100 countries.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of BAX – May 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $37,753,169,007 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.57 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 32.05% Fail
6. Moderate PEmg Ratio PEmg < 20 19.30 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.24 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.57 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.79 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.59
MG Growth Estimate -1.56%
MG Value $19.31
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $52.07
MG Value based on 0% Growth $30.53
Market Implied Growth Rate 5.40%
Current Price $69.32
% of Intrinsic Value 358.99%

Baxter International Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PB ratio. The Enterprising Investor is only concerned with the lack of earnings growth over the last five years. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $4.01 in 2014 to an estimated $3.59 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.4% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Baxter International Inc revealed the company was trading above its Graham Number of $32.11. The company pays a dividend of $0.61 per share, for a yield of 0.9% Its PEmg (price over earnings per share – ModernGraham) was 19.3, which was below the industry average of 42.49, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-1.3.

Baxter International Inc receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$1.30
Graham Number $32.11
PEmg 19.30
Current Ratio 2.57
PB Ratio 4.24
Current Dividend $0.61
Dividend Yield 0.88%
Number of Consecutive Years of Dividend Growth 1

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Total Current Assets $7,263,000,000
Total Current Liabilities $2,821,000,000
Long-Term Debt $3,509,000,000
Total Assets $17,111,000,000
Intangible Assets $4,473,000,000
Total Liabilities $7,987,000,000
Shares Outstanding (Diluted Average) 558,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.72
Dec2017 $1.29
Dec2016 $9.01
Dec2015 $1.76
Dec2014 $4.56
Dec2013 $3.66
Dec2012 $4.18
Dec2011 $3.88
Dec2010 $2.39
Dec2009 $3.59
Dec2008 $3.16
Dec2007 $2.61
Dec2006 $2.13
Dec2005 $1.52
Dec2004 $0.63
Dec2003 $1.50
Dec2002 $1.66
Dec2001 $1.09
Dec2000 $1.25
Dec1999 $1.35
Dec1998 $0.55

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.59
Dec2017 $4.04
Dec2016 $5.15
Dec2015 $3.35
Dec2014 $4.01
Dec2013 $3.67
Dec2012 $3.60
Dec2011 $3.24
Dec2010 $2.88
Dec2009 $2.95
Dec2008 $2.42
Dec2007 $1.93
Dec2006 $1.55
Dec2005 $1.27
Dec2004 $1.17
Dec2003 $1.42
Dec2002 $1.31

Recommended Reading:

Other ModernGraham posts about the company

10 Low PE Stock Picks for the Defensive Investor – August 2017
10 Low PE Stock Picks for the Defensive Investor – February 2017
10 Undervalued Companies for the Defensive Investor – February 2017
10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017
10 Low PE Stock Picks for the Defensive Investor – January 2017

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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