 |
| Dow | Nasdaq | About Us | Disclaimer |  |
RSS Feed |  |
Follow us on Twitter |
|
Featured Advisors |
Wednesday August 04, 2010
Baxter Int'l (BAX): 'Fine time to buy'
by Richard Moroney, editor Dow Theory Forecasts  Baxter International (BAX) shares are down at least in part on legitimate bad news, and avoiding such trouble is a natural human response.But if a company’s problems are transitory and its growth story intact, the midst of a slump can be a fine time to buy in. The stock is down 24% since issuing disappointing profi t guidance in April. Baxter surprised Wall Street by blaming weakness on plasma-based products — a market niche that was supposed to drive growth — and government-mandated drug rebates. Since then, product recalls have kept pressure on the stock price. Over the last five years, Baxter averaged a 15% discount to the average health-care-equipment company in the S&P 500 Index based on trailing P/E. 
However, the current P/E ratio of 12 is near its lowest level in fi ve years, and the stock trades at a 31% discount to its peer-group average. Baxter also trades at a discount of at least 20% to its own five-year average for price/earnings, price/sales, and price/cash flow. Those valuation ratios suggest Baxter shares have a lot of room to rebound. Even a modest jolt of good news could revitalize the stock. The shares have risen 7% since announcing June-quarter earnings of $0.93 per share excluding special items, down 3% and a penny above the consensus. Sales rose 2% and were flat in constant currency, as 9% growth at the medical-delivery unit offset declines at the plasma business. The quarter was by no means a blowout, yet the news was better than expected, and the stock responded. Looking ahead In the wake of recent gains, here are three reasons to be excited about future price action. ➤ Low expectations. The consensus projects growth of 3% in sales and per-share profi ts this year. Baxter set its bar pretty low, and the company seems capable of exceeding those targets. Wall Street expects per-share profi ts of $3.93 this year, and on July 22, Baxter projected $3.93 to $3.98. Baxter does not need 25% profi t growth to spark share-price gains. ➤ Regulatory strictures. Baxter lowered profi t-margin guidance in April, citing the effects of health-reform legislation. Rivals have not been so pessimistic, suggesting Baxter’s projections may prove overly cautious. ➤ Plasma developments. Baxter has seen a recession-induced decline in demand for its premium products. However, a stronger economy and new products should restore growth by 2011. Baxter shares yield 2.6%, offer- ing some compensation to investors willing to wait for further gains in operating momentum. The dividend has risen at an annualized rate of 26% over the last three years but still represents just 30% of trailing earnings. Baxter, a Long-Term Buy, seems capable of double-digit annual profit growth over the next five years, operating strength not refl ected in the current valuation. Learn more about this financial newsletter at Richard Moroney, editor Dow Theory Forecasts. |
News Flash
|
|