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About Baxter International

Shoutout to Lee Ainslie, founder of Dallas-based hedge fund Maverick Capital and my university’s investment corporation, UTIMCO, for the inspiration for today’s article.

If I am ever in the market for some inspiration regarding which companies or stocks I should analyze next, one of my favorite methods of finding a short list of contenders is peering over SEC filings and reports (13Fs, primarily) of some of my favorite investors and their funds and finding some companies I might not have ever even heard of before within their portfolios, leading me to naturally learn why the fund manager in question opted to dedicate a sizable portion of their entire portfolio to a certain company and its stock.

That is exactly what is happening today, at least, as Baxter International is a sizable portfolio position maintained in both Ainslie’s portfolio and UTIMCO’s portfolio as well.

I guess it would help just a smidge if we actually talked about what it is exactly that Baxter does, which industries it operates within, how it makes money and perhaps even whether or not the company can be reasonably thought of or viewed as being recession resistant.

So, let’s do just that.

Baxter International is headquartered in Deerfield, Illinois and can be broadly categorized as a healthcare company, and in zooming in a bit closer, the company is specifically a large player in the business of manufacturing and selling medical devices and pieces of supplemental equipment that can be found primarily in any and every hospital within the developed world.

From intravenous products and devices thereof to complex software and screening equipment, among quite literally an ocean of other products and solutions offered to healthcare professionals across the board, Baxter International has a lot to offer to both patients and medical practitioners, especially evidenced through the company’s growth through strategic acquisitions, with, for example, one of the company’s more notable and sizable acquisitions being its $2.05 billion buyout of a fellow medical device manufacturer and systems company by the name of Hill-Rom, which is home to well known brands within the medical and acute care segments of the healthcare space, one being Welch Allyn. 

This very fact alone leads us to initially conclude that this company is one that is fairly resistant to recessionary pressures, as regardless of the general condition of the overall economy, this will generally have little to no bearing on how many folks around the United States (and the globe for that matter) will need tests and both general and specific forms of treatment performed, objectively boding well for a company such as Baxter, as hospitals, hospital systems and even more narrow healthcare facilities and centers will more than likely continue ordering products from Baxter regardless of which economic phase they find themselves operating within.

Now that some of the general groundwork has been laid regarding Baxter International, it’s only right that we delve right into the company’s financials in hopes of ultimately determining whether or not the medical device conglomerate’s stock is worth considering buying and holding, especially with its shares down just about 40% over the last five years.

Baxter’s stock financials

In getting things formally started off on the financial side of things with Baxter, the company presents a share price of $38.80 along with an associated market capitalization of $19.68 billion along with an annually distributed dividend of $1.16 to its shareholder base while boasting a present price-to-earnings (P/E) ratio of 604.63, indicating that this seasoned healthcare products and services provider’s share price is trading well, well, well and then on top of that pretty well ahead of its actual, intrinsic value, even after the gradual share price decline experienced throughout the last handful of years.

With this initial information unveiled, things aren’t off to the best of starts, as the company’s stock price (NYSE: BAX) appears to be quite overvalued, especially referencing the fact that it is commonly held that a price-to-earnings ratio of 20 indicates that a security (fancy word for stock or some other publicly tradable entity) is trading at exactly fair value, or what it is worth paying for, whereas any price-to-earnings ratio greater than 20 indicates that said security is overvalued, and suffice it to say north of 600 is a ways away from 20.

Because we don’t really see anything else embedded in this initial information that gets us jazzed out of our minds, let us check out the company’s general condition as it relates to its balance sheet, as the company’s executive team is tasked with taking care of and making the best out of around $28.3 billion in terms of total assets along with approximately $22.4 billion in terms of total liabilities, which, all things considered, isn’t all that bad of a balance sheet breakdown, but at the same token it is most certainly not by any means tipping our scales when it comes to our confidence or lack thereof when it comes to considering an investment in this firm or not, as this is as about as basic of a balance sheet as it gets, especially as it would stand with a medical device and instrumentation company as large and scaled as this one.

Honestly, it’s pretty boring in this sense, however, we aren’t exactly thrill seeking when we are peering through billion-dollar industry leaders within the healthcare sector.

With respect to the company’s income statement, Baxter’s total annual revenues (specifically referencing since 2018) remained pretty much the exact same year-over-year (YOY) between and during 2018 and 2020, standing at $11 billion each year, however, proceeded to experience an uptick in the couple of years that followed (evidently, when the public onset of COVID-19 occurred), rising to as high as $15.1 billion, as reported during the year end of 2022, which is more than likely a byproduct of a few things, one most certainly being heightened organic demand for the company’s products and services within the healthcare setting, for instance, as hospitals were and continue to be stretched for equipment and devices that increase efficiency and drive down costs, and they might just be able to do exactly that through the utilization of Baxter’s extensive product mix, not to mention that the company likely induced some price hikes due to prevailing supply chain stresses, naturally acting as a means of beefing up the company’s revenues as well on a non-transactional basis.

From where we stand, recent mild revenue growth was to be expected and it is thankfully what we got.

Onto the condition of the company’s cash flow statement, Baxter’s total cash from operations figures in particular have remained positive and somewhat consistent for the most part, for instance, during the same time period ranging between $1.2 billion (2022) and $2.2 billion (2021), with its corresponding net income figures remaining consistent and positive for the most part as well, largely indicating that Baxter runs a fairly predictable, cash flow generative business, which makes a good deal of sense given previous bits of context, but again, confirmation hardly ever hurts.

Baxter’s stock fundamentals 

Now, let’s take a brief look into the company’s profitability and also how it particularly measures up against the industry’s respective average, of which both of these figures can be found on TD Ameritrade’s platform.

Specifically, Baxter’s trailing twelve month (TTM) net profit margin is displayed as 0.29% to the industry’s respective average of a more impressive and compelling 5.17%, which, to a degree, can be justified by the fact that Baxter is a very large, global enterprise with customers, products and operations spread out all over the world, thus naturally tempering off its margins due to the constant and expansive influx of costs faced by this firm, however, we still deem this to be a discomfortingly wide difference, as according to this figure, Baxter is just barely making any profit (after all of its expenses and other related costs, that is) as a percentage of revenue, which, is seemingly somewhat common within the industry, as, for instance, McKesson, one of Baxter’s fiercest competitors currently maintains a TTM net profit margin with the posture of 1.25% (also according to TD Ameritrade’s platform), which by no means justifies maintaining a low TTM net profit margin but adds a bit of color to the situation and general industry standings for really large companies and operators, of course, in this category lies Baxter.

Regarding the company’s core TTM returns on the bases of assets and investments, Baxter International’s are both once again frighteningly far off from those of the industry’s averages, with, for instance, the company’s TTM return on investment standing at 0.18% to the industry’s average of 7.60%, indicating that Baxter is quite inefficient with its capital and other financial resources at its disposal and that the investments it has previously planted down have hardly bore any fruit since their initial implementations.

Should you buy Baxter stock?

Overvalued, an okay balance sheet, horrible comparable TTM returns on both assets and investments are the first several cons we’ve garnered from Baxter.

However, in giving credit where credit is rightfully due, Baxter’s balance sheet isn’t really all that major of a concern for us, and as we previously stated, it is in fine condition, or is nothing special, and admittedly its revenues have been trending in the right direction, remaining stable then growing on a recent year-over-year basis due to COVID-19 and other prevailing tailwinds for a company such as Baxter operating in the broad, deep and vast healthcare sector of the economy.

However, we still fail to see from a margin standpoint and a valuation perspective why the two aforementioned entities (Ainslie and UTIMCO) are seemingly so bullish on the company, its prospects and its stock (NYSE: BAX), but perhaps one of the reasons could be due to its share price coming down to historic lows, however, its valuation is still wildly high given its prospects as well as its current financial posture.

Therefore, until things turn a bit for the better, we aren’t interested in Baxter International at the moment and thus the “sell” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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