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Baxter Will Remain Diversified and With Competitive Advantages

ovenerio

ovenerio

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In this article, let's take a look at Baxter International Inc. (BAX), a $40.61 billion market cap company, which is a global medical products and services company that provides critical therapies for people with life-threatening conditions.

Competition

More than two-thirds of Baxter's revenue stems from market-leading products, a tribute to its global competitive advantages with products like Advate and Gammagard.

However, competition is growing fast. Biogen Idec (BIIB) plans to launch long-acting product Eloctate, while Novo Nordisk (NVO) could launch a me-too Advate in 2015, and Bayer (BAYRY) and Novo could both launch long-acting products in 2016.

Following A Two-Year Trend in the Industry

Baxter will split into two companies in an industry where Abbott Laboratories (ABT), Pfizer Inc. (PFE) and Bristol-Myers Squibb Co. (BMY) have all sold, spun off or split apart businesses. It is planned two companies, one focused on developing biotechnology and pharmaceutical products and one that sells medical products. The transaction is expected to be completed by mid-2015.

Acquisition

Last year, Baxter acquired Gambro AB, a Swedish maker of dialysis products with indicated sales of about $1.6 billion, for about $4 billion.

This acquisition strengthens the company´s role in the hemodialysis (HD) and renal replacement therapies complementing its peritoneal dialysis (PD) renal care business.

Gambro had a strong presence abroad so the company will be benefited in foreign markets, especially in European markets. Further, it will also expand in key markets such as Asian and Latin American markets. Emerging markets are a prime source of growth for many drug firms and Baxter is not the exception.

Revenues, margins and profitability

Looking at profitability, revenue growth by 16.21% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.95 vs $1.07). During the past fiscal year, the firm reported lower earnings of $3.65 versus $4.18 in the prior year. This year, Wall Street expects an improvement in earnings ($5.16 versus $3.65).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

BAX

Baxter

23.77

ABT

Abbott Laboratories

10.23

MDT

Medtronic Inc

15.76

COV

Covidien

18.39

 

Industry Median

8.68

The company has a current ROE of 23.77% which is higher than the industry median and its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

1409543863149.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 21.1x, trading at a discount compared to an average of 34.6x for the industry. To use another metric, its price-to-book ratio of 4.7x indicates a premium versus the industry average of 3.25x while the price-to-sales ratio of 2.51x is above the industry average of 2.80x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.142, which represents a 8.7% compound annual growth rate (CAGR).

1409543836816.png

Final comment

The company has executed successful spinoffs in the past, so the planned separation of these two businesses will probably be successful too. With the acquisition of Swedish dialysis player, medical products are likely to remain Baxter's largest business in the upcoming future.

Moreover, intangible assets in hemophilia in countries such as Brazil, Russia, and China; are part of its long-term competitive advantages.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like John Keeley (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Jim Simons (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Charles Brandes (Trades, Portfolio), John Buckingham (Trades, Portfolio) and Bill Frels (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

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ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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