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Baxter International – A Low-Risk Buy/Write Candidate

April 12, 2009 | About:
Baxter Intl. [NYSE:BAX] April 12, 2009: $49.23

52-week range: $46.63 (Apr. 7, 2009) - $71.53 (Aug. 15, 2008)

Dividend = $0.26 quarterly = 2.11% current yield


Baxter International Inc. develops, manufactures, and markets products and technologies related to the blood and circulatory systems. They also develop, manufacture, and sell vaccines for the prevention of infectious diseases. Baxter conducts operations in North America, Asia, Europe, Japan, and Latin America. Over 50% of revenues come from outside the US.

Baxter just completed an all-time record year in terms of sales, cash flow, earnings and dividends paid. 2008 marked the fourth straight year of significant improvement and consensus views now look for even better EPS of $3.75 and $4.24 for 2009 and 2010 respectively.

Despite all this good news BAX shares hit a two-year low of $46.63 on April 7th and they still trade at just $49.23 today. That’s just 13.1x this year’s and < 11.7x next year’s estimates versus a 10-year median multiple of 22x.

Baxter recently raised its dividend to $0.26 quarterly giving buyers at today’s quote a 2.11% current yield that represents just a 28% payout ratio on 2009 projections. That yield level for Baxter’s shareholders has only been exceeded once in the past 11 years. That was in early 2003 when the shares bottomed at $18.20 – right before starting a steady five-year climb to $71.53 last summer.

Value Line rates Baxter’s financial strength as ‘A++’ and assigns them their top safety category. They garner a 100th percentile ranking for ‘stock price stability’ and a 75th percentile mark for ‘earnings predictability’ (with 100th being best).

Here are the per share numbers from the past four years as reported

by Value Line:

Year ….. Sales …..… C/F ….... EPS …... Div ….. Avg. P/E

2005 ….. 15.76 ….. 2.46 ….. 1.52 ….. 0.58 ….… 24.5x

2006 ….. 15.95 ….. 3.13 ….. 2.23 ….. 0.58 ….… 18.4x

2007 ….. 17.78 ….. 3.80 ….. 2.79 .…. 0.72 ……. 19.6x

2008 ….. 20.08 ….. 4.53 ….. 3.38 ….. 0.91 ……. 18.2x

A rebound to even a 15 multiple on this year’s estimate would bring Baxter shares back to $56.25 by year-end. That seems to be a pretty conservative target as BAX shares peaked at $61.10, $71.53 and $61.00 in 2007-2008 and already again in 2009.

Here’s my buy/write play for great potential returns through next January:


………………………………................……… Cash Outlay ……….........…… Cash Inflow

Buy 1000 BAX @$49.23 …........……..….. $49,230

Sell 10 Jan. $50 Calls @$5.30 ………………………………..................….… $5,300

Sell 10 Jan. $50 Puts @$6.60 ……………………………................……….. $6,600

Net Cash Out-of-Pocket ………….......…… $37,330

On expiration date (Jan. 15, 2010) if BAX shares are > $50:

Your $50 calls will be exercised.

You will sell your shares for $50,000 cash.

Your $50 puts will expire worthless (a good thing for you as a seller).

You will have collected 3 dividends totaling $780.

You will have no further option obligations.

You will have $50,780 for your original outlay of $37,330.

That’s a best-case scenario $13,450 net profit on $37,330 or + 36.03%

On shares that only needed to rise by 1.6% from your purchase price.


What’s the risk?

If Baxter shares stay under $50 through January 15, 2010:

Your $50 calls will expire worthless.

Your $50 puts will be exercised.

You will be forced to buy another 1000 shares of BAX.

You will need to lay out an additional $50,000.

You will then hold 2000 shares of BAX.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s the $49.23 purchase price less the

$5.30 call premium = $43.93 /share.

On the ‘put’ shares it’s the $50 strike price less the

$6.60 put premium = $43.40 /share.

Your break-even point is the average of:

$43.93 + $43.40 = $43.67 /share.

Thus, a drop of up to $5.56 or (-11.3%) would not result in a loss.

That $43.67 break-even price is lower than the worst trade price since late in 2006 when EPS were $2.23 versus last year’s $3.38 /share.


Summary: Buying high-quality Baxter shares and selling $50 calls and puts for January 2010 can give you a total return of over 36% on even a 2% move in the stock. In a worst case scenario you’d end up owning twice the shares at about a 2 ½ year low price and a forward P/E of < 11.7x.


Disclosure: Author is long BAX shares and short BAX options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.3/5 (9 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Baxter 1Q profit rises 20 percent, but sales fall. BAX shares up pre-market.

April 16, 2009 8:13 AM ET



Associated Press newsDEERFIELD, Illinois (AP) - Specialty drug and medical device maker Baxter International Inc. said Tuesday its profit climbed 20 percent in the first quarter, but like several rivals, its sales fell short of expectations due to new strength in the dollar.

The company said it earned $518 million, or 83 cents per share, compared with $432 million, or 67 cents per share, during the same period last year. Its revenue slipped 2 percent to $2.82 billion from $2.88 billion despite better sales from its BioScience business.

Analysts expected profit of 81 cents per share and $2.87 billion in revenue, according to a Thomson Reuters survey.

Baxter said revenue from the BioScience unit grew 3 percent, to $1.3 billion. Baxter credited better sales of antibody therapies and plasma-protein products, greater demand for a hemophilia treatment and strong biosurgery product sales.

Revenue from its medication delivery business fell 3 percent to $1 billion, and renal sales fell 8 percent to $515 million.

Excluding the impact of currency exchanges, Baxter said BioScience revenue rose 11 percent, medication delivery sales grew 6 percent, and kidney product sales edged up 1 percent.

Earlier this week, Johnson & Johnson and Abbott Laboratories both reported disappointing first-quarter revenue because of unfavorable currency exchange rates. Abbott said Wednesday that foreign currency exchange rates were less favorable than it had anticipated.

Baxter also modestly raised the low end of its full-year profit forecast range. The company now expects an adjusted profit of $3.72 to $3.78 per share, compared with an earlier forecast of $3.70 to $3.78 per share. Analysts expect profit of $3.74 per share.

In the second quarter, Baxter said it expects an adjusted profit of 93 cents to 95 cents per share, but predicted sales would be weaker than a year ago because of currency exchange rates. Baxter reported $3.19 billion in sales in the second quarter of 2008, and expects a decrease by a percentage in the low single digits.

Analysts expect a profit of 95 cents per share and $3.13 billion in revenue.

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