Is Baxter Stock Fully Valued?

Baxter stock (NYSE: BAX), a healthcare company, currently trades at $38 per share, more than 50% lower than the level seen in February 2022. BAX stock has fared worse than its peer – Becton, Dickinson & Company stock (NYSE:BDX), down 7% over this period. BAX stock has been weighed down lately amid falling profit margins and a sale of its Vantive Kidney Care business this year at a price lower than the street estimates. BAX stock was trading at around $60 in early June 2022, just before the Fed started increasing rates, and is now 36% below that level, compared to over 50% gains for the S&P 500 during this period.

Notably, BAX stock has performed worse than the broader market in each of the last three years. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and the uncertain geopolitical environment, could BAX face a similar situation as it did in recent years and underperform the S&P over the next 12 months — or will it see a recovery? Returning to the pre-inflation shock level of $83 implies that BAX stock will have to gain around 115% from here, and we don’t think that will materialize anytime soon. In fact, we think BAX stock is appropriately priced. It currently trades at 1.4x trailing revenues, aligning with its average P/S ratio of 1.4x over the last six quarters. Notably, the $41 average of analysts price estimate for Baxter also reflects just 5% upside from here.

Our detailed analysis of Baxter’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
• August 2023 – August 2024: Fed has kept interest rates unchanged to quell fears of a recession and keep inflation in check
• September 2023: Fed cut rates by 50 bps and pointed to more rate cuts going forward

In contrast, here’s how BAX stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Baxter and S&P 500 Performance During 2007-08 Crisis

BAX stock declined from nearly $28 in August 2008 (pre-crisis peak for Baxter) to $20 in March 2009 (as the markets bottomed out), implying it lost 26% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $24 in early 2010, rising about 15% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Baxter Fundamentals Over Recent Years

Baxter’s revenue rose from $12.1 billion in 2021 to $14.8 billion in 2023, driven by increased demand for advanced surgery products. In December 2021, Baxter completed the Hillrom acquisition, which added connected care offerings, including Smart Beds and patient monitoring products, to Baxter’s existing portfolio of acute, nutritional, renal, hospital, and surgical care products. However, the company’s operating margin declined from 11% to 3% between 2021 and 2023. Baxter sold its Vantive Kidney Care business to Carlyle, a private equity investor, for $3.8 billion, lower than the street expectations.

Does Baxter Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Baxter’s total debt decreased from $18.3 billion in 2021 to $13.3 billion now, while its cash decreased from around $3.7 billion to $2.1 billion over the same period. The company also garnered $1.2 billion in cash flows from operations in the last twelve months. The company will also receive $3 billion in proceeds from the sale of its Vantive Kidney Care business. The high debt burden is a near-term risk that the company faces. The company’s market capitalization has shrunk to $19 billion now, and a debt level of $13 billion implies a high debt to equity ratio of 68%.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Baxter (BAX) stock is fairly priced, with limited upside potential. The stock could rebound if the profitability improves. Still, a high deb burden remains a key risk factor. 

While BAX stock has room for some gains, check out how Baxter’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/30/2024
[2] Cumulative total returns since the end of 2016

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