On July 20, 2023, Baxter International Inc (BAX, Financial) experienced a gain of 3.01%, closing at $49.29 per share. Despite this positive performance, the company's GF Value indicates a possible value trap, with a fair value estimate at $101.76. With a market capitalization of $24.9 billion and sales of $15.1 billion, Baxter International is a significant player in the medical devices and instruments industry.
Baxter International Inc, known for its wide range of medical instruments and supplies, significantly expanded its hospital-focused offerings through the acquisition of Hillrom in late 2021. The company's portfolio includes tools for patients with acute and chronic kidney failure, injectable therapies, nutritional products, and surgical sealants. Moreover, Baxter offers contract manufacturing services to pharmaceutical companies. The Hillrom acquisition added basic equipment, including hospital beds, to the portfolio, with around half of Hillrom's 2021 revenue coming from digitally connected offerings like its smart beds and Voalte medical communications app.
GF Value Analysis of Baxter International (BAX, Financial)
The GF Value of Baxter International, calculated based on historical trading multiples, an adjustment factor from GuruFocus, and estimates of future business performance, suggests a potential value trap. If the share price significantly exceeds the GF Value Line, it may indicate overvaluation and poor future returns. Conversely, if the share price is significantly below the GF Value, the stock may be undervalued and could offer higher future returns. Given Baxter International's current price of $49.29 per share, careful consideration is advised.
Our apprehension about Baxter International as a potential value trap stems from its Altman Z-score of 1.79. This score places the company's financial condition in the distressed zone, implying a higher risk of bankruptcy. Ideally, an Altman Z-score above 2.99 would indicate safer financial conditions. You can learn more about the Z-score's role in measuring financial risk here.
Evaluating Financial Strength and Profitability
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. Baxter International's cash-to-debt ratio of 0.1 is worse than 93.37% of companies in the Medical Devices & Instruments industry, indicating poor financial strength. You can view Baxter International's debt and cash history here.
Investing in profitable companies, especially those with consistent long-term profitability and high profit margins, typically poses less risk. Baxter International has been profitable for 9 of the past 10 years. Over the past twelve months, the company reported a revenue of $15.1 billion and a loss per share of $-4.88. Its operating margin of 6.16% ranks better than 58.83% of companies in the industry, indicating fair profitability.
Growth and ROIC vs WACC Analysis
Growth is a critical factor in a company's valuation. Baxter International’s 3-year average revenue growth rate is better than 60.56% of companies in the Medical Devices & Instruments industry. However, the company's 3-year average EBITDA growth rate is 0%, which ranks worse than all companies in the industry.
Comparing a company’s return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate profitability. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Baxter International’s ROIC was 3.87 while its WACC came in at 4.81. You can view the historical ROIC vs WACC comparison of Baxter International here.
Conclusion
In conclusion, Baxter International (BAX, Financial) appears to be a potential value trap. The company's financial condition is poor, and its profitability is fair. Its growth ranks worse than all companies in the Medical Devices & Instruments industry. To learn more about Baxter International stock, you can check out its 30-Year Financials here.
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