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Baxter [NYSE:BAX - $41.82] has dropped back over 32% from its 2010 high of $61.88 due to reduced guidance related to Obamacare costs and lower than expected plasma sales. Even so, full-year EPS are still expected to hit an all-time high.
Baxter has been a very consistent grower but has shown occasional down years. A peak earnings year in 2002 saw BAX shares hit $59.90 before a disappointing 2003 outlook took the shares down to $24.10. Astute buyers near that point watched BAX go on a multi-year run which topped out in 2008 above $71. The current pullback may turn out to be a similar opportunity.
Here are Baxter’s per share numbers (excluding non-recurring items) as reported by Value Line:
Year | Sales | C/F | EPS | Div. | B/V | Avg. P/E |
2002 | 13.53 | 2.71 | 1.92 | 0.58 | 4.90 | 22.5x |
2003 | 14.59 | 2.40 | 1.52 | 0.58 | 5.44 | 17.5x |
2004 | 15.44 | 2.66 | 1.68 | 0.58 | 6.01 | 18.8x |
2005 | 15.76 | 2.46 | 1.52 | 0.58 | 6.88 | 24.5X |
2006 | 15.95 | 3.13 | 2.23 | 0.58 | 9.64 | 18.4X |
2007 | 17.78 | 3.80 | 2.79 | 0.72 | 10.91 | 19.6X |
2008 | 20.05 | 4.52 | 3.38 | 0.91 | 10.11 | 18.2X |
2009 | 20.90 | 4.94 | 3.80 | 1.07 | 11.97 | 14.2X |
Zacks and Standard and Poors are each looking for about $3.93 and $4.26 in EPS for 2010 and 2011 respectively. That puts Baxter’s multiples at 10.7x current year’s and about 9.8x next year’s estimates. Just a quick glance at the chart shows how cheap those are historically.
The $0.29 quarterly dividend represents a 2.77% current yield – almost double the typical rate from the past decade. It’s also more than most 2 – 3 year bank CDs pay in today’s near zero interest rate environment. That alone should provide some support for the stock at today’s closing price.
Value Line takes a very conservative view in using a 14 multiple to figure a 3 – 5 year goal price range of $75 – $90 with assumed earnings of $6.00 /share. Even 14x this year’s estimate would see BAX shares bounce back to the $55 range. That’s 31.5% above the present quote.
Is that a reasonable goal? Standard and Poors thinks so. Their ‘Fair Value’ for BAX is $55.80 although they only assume a 12-month target price of $50 – still about 20% higher than the $41.82 closing trade.
Is Baxter a high-risk stock? Nope. Value Line rates their financial strength as ‘A++’ and their safety in their highest classification. ‘Stock price stability’ and ‘earnings predictability’ come up big as well with 95th and 85th percentile rankings (with 100th being best). Beta is low at 0.65.
Downside? There are always unexpected risks but at $41.82 BAX now trades at below the absolute lows of 2007-2008-2009. The incredible market melt-down of late 2008 through March 9, 2009 makes that especially noteworthy.
Baxter appears to offer very limited risk with upside of at least 20% - 30% on top of its 2.77% yield. I’m a buyer.
Option savvy traders may want to consider writing (selling) some LEAP puts for 2011 and/or 2012 to lock in even lower potential purchase prices and an additional margin of safety.
Here are some good looking puts and their prices:
Put Premium /sh. | Net Cost ‘If Put’ | Margin of Safety | |
Jan. 2011 $45 puts | $6.60 | $38.40 | 8.1% |
Jan. 2012 $45 puts | $9.20 | $35.80 | 14.4% |
Jan. 2012 $50 puts | $12.50 | $37.50 | 10.3% |
Jan. 2012 $55 puts | $16.40 | $38.60 | 7.7% |
All the above could easily expire worthless at expiration if my reasoning is sound. If ‘put’ you’d be getting in at multi-year lows with an even higher yield than available today.
Dr. Paul Price – May 24, 2010
www.BeatingBuffett.com
Disclosure: Author is long BAX shares and short BAX options.
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