Should You Buy Baxter Stock Under $60?

BAX: Baxter logo
BAX
Baxter

Baxter stock (NYSE: BAX) has seen a 32% fall this year, underperforming the broader S&P500 index, down 17%. Even if we look at the longer term, BAX stock, with -10% returns from levels seen in late 2017, has underperformed the S&P 500 index, up 47%. After the recent fall for Baxter, we believe it now has some room for growth, as discussed below.

This 10% fall for Baxter stock since late 2017 can primarily be attributed to 1. a 33% decline in the company’s P/S ratio to 2.1x trailing revenues currently, compared to 3.1x in 2017, 2. an 11% rise in its total shares outstanding to 504 million, partly offset by 3. Baxter’s revenue rising 34% to $14.2 billion over the last twelve months, compared to $10.6 billion in 2017,  The rise in revenue and shares outstanding has meant that Baxter’s revenue per share rose only 20% to $28.16 over the last twelve months, vs. $23.38 in 2017. Our dashboard on Why Baxter Stock Moved has more details.

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Baxter’s sales growth over the recent years has been led by increased demand for its 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. The Hillrom acquisition is expected to be low double-digit EPS accretive by 2023 and even higher over the subsequent years.

Baxter is seeing its net margins contract with higher inflation resulting in increased raw material costs and supply chain disruption, also weighing on the margin growth. For perspective, the company reported a 56% y-o-y rise in SG&A expenses in the first half of 2022, compared to a 23% rise in total sales. Baxter’s operating margins have declined to 6.4% currently, compared to 11.6% in 2017 and 15.0% in 2019, before the pandemic. Our Baxter Operating Income Comparison dashboard has more details.

Looking at BAX stock, we estimate Baxter’s valuation to be $64 per share, reflecting a 10% upside from its current market price of $58. At its current levels, BAX stock is trading at 1.9x forward expected revenues, compared to the last three-year average of 3.3x, implying that it has more room for growth. That said, we don’t expect a significant upside from its current levels, partly due to the contraction in operating margin. Although the company expects its operating margin to improve over the coming years, it will depend on the integration with Hill-Rom, while it continues to face inflationary headwinds in the near term.

While BAX stock looks like it has more room for growth, it is helpful to see how Baxter’s Peers fares on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Phibro Animal Health vs. Tri Pointe Homes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 BAX Return 1% -32% 31%
 S&P 500 Return -1% -17% 76%
 Trefis Multi-Strategy Portfolio 1% -15% 236%

[1] Month-to-date and year-to-date as of 9/14/2022
[2] Cumulative total returns since the end of 2016

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