Baxter International Inc.: Financial Analysis. Shane Convery. Managerial Finance

Transcription

1 Convery 1 Baxter International Inc.: Financial Analysis Shane Convery Managerial Finance February 17, 2013

2 Convery 2 Table of Contents Executive Summary 3 History And Background 4 Recent Events 5 Information About the Industry 6 Sustainability 6 Financial Health 7 Stock Valuation & Risk 9 Debt Policy 11 Summary 11 Appendix 13 Bibliography 15

3 Convery 3 Executive Summary Baxter International Incorporated is very prosperous company in the healthcare sector. The majority of their success has come from their focus on medical instruments and supplies. Infusion pumps, pre-filled syringes, anesthetics, vaccines, and biological sealants are just a few of their many products. They are also a leading manufacturer of IV fluids and distributor of Plasma. With total revenues of 14.9 billion dollars in the 2012 fiscal year, Baxter International is looking great to current and potential shareholders. The current dividend yield of 2.7 percent is a solid consistent return on one s investment and is projected to increase in the coming years. The company s sustainability efforts are as positive as their financial health. With several hefty green goals, Baxter is reducing their carbon footprint and becoming even more appealing to investors. This report will dive into the numerous reasons to buy Baxter International s prosperous stock.

4 Convery 4 History And Background Baxter International was founded in 1931 as the first manufacturer of commercially prepared intravenous (IV) solutions. Dr. Don Baxter started distributing his products all over his home town of Los Angeles, California. However, as demand increased throughout the Midwest, a manufacturing facility was opened in Glenview, Illinois in The company quickly exploded with growth and managed to survive World War 2 by supplying blood-collection products to the U.S. Armed Forces. Baxter International became publicly traded on the New York Stock Exchange in As a company they realized to stay alive in this competitive industry that they needed to assert some of their energy in research and development. New vaccines and cures have become a crucial part in Baxter s widespread prosperity. The company saw immense international development in the 1950s. Offices and manufacturing facilities were opened in Belgium and China. Today, their headquarters are centrally located in Deerfield, Illinois and now employ over 48,500 employees across the world. Plasma collection and distribution has become an integral part of the corporation as well. The plasmapheresis process not only saves the lives of countless individuals, it provides monetary support for the individuals taking the time to donate their plasma. BioLife Plasma services are located all over the United States and do the majority of collecting for Baxter. Baxter supplies nearly all the products necessary for the collection process. After receiving the collected plasma, they distribute it to those in need of this valuable solution. This is just one of the many ways Baxter International has expanded their company s outreach to ensure future prosperity and investor confidence.

5 Convery 5 Recent Events The 2012 fiscal year was one for the record books according to a recent Baxter International press release. They reported record sales, earnings, and cash-flow. Therefore, they must be doing something right. This report also provided Baxter s predictions for the coming year. With the acquisition of a few smaller companies and advancing research, they predict earnings per share to nearly double to $4.60-$4.70. Along with promising financial predictions, Baxter will be broadening their presence in the global healthcare market. On February 7, 2013 they announced that they would be presenting in the Citi 2013 Global Healthcare Conference towards the end of the month. Here they can pitch their products to potential clients and investors. They can also present their latest products and developments in their research department. Baxter is always focused on finding potential treatments/cures for numerous diseases including; hemophilia, immune disorders, infectious diseases, and other chronic and acute medical conditions. They are making serious progress especially in the treatment of Hemophilia A. On January 7, 2013, Baxter announced that they had submitted an Investigational New Drug (IND) application with the Food and Drug Administration. The new drug did exceptionally well in the Phase 1 trial and will now proceed to enroll adult patients in Phase 2 and 3. Baxter has over 60 years experience in hemophilia and has introduce a number of beneficial things for patients battling this disease. However, this new drug could be huge in the medical world.

6 Convery 6 Information About the Industry According to Yahoo! Finance, Baxter International, Inc. finds themselves in the Healthcare sector and in the Medical Instruments and Supplies industry. A few of their top competitors include: Becton, Dickinson and Company (BDX), Fresenius Medical Care AG & Co. (FMS), and Grifols, S.A. (GRFS). The industry s average dividend yield is 1.6 percent. Baxter s yield of 2.7 percent is much more appealing than the majority of companies in this industry. Baxter also leads the industry in market capitalization. This is probably because most of their competitors produce only instruments and supplies. Why choose between making drugs and making equipment when you can do both? Baxter does exactly that. Sustainability Baxter s definition of success goes beyond sound financial performance. They believe that be as sustainable as possible is their duty toward the environment and its shareholders. This attitude has helped them make the Global 100 Most Sustainable Corporations in the World list eight consecutive years. They have done this by pursing three main initiatives: to decrease greenhouse gas emissions, to conserve water, and to save energy. An entire website has been devoted to the company s efforts in preserving the environment and decreasing their carbon footprint. Back in 2005, managers set out to hit a series of goals by One of the goals was to reduce energy by 30% by Thus far, Baxter International has already seen a 24% decrease through Another major goal was to reduce water usage by 35% by They have nearly hit this goal already with a 33% decrease thus far. Initiatives like these are what more

7 Convery 7 corporations need to implement. Baxter is doing more than their part to be sustainable and produce as little of impact on our environment as possible. Financial Health Baxter International s financial performance over the past three years has been quite impressive. After breaking down numerous equations and comparing the results from year to year, it was easy to spot the trends in the company and what they need to improve upon. Ratio Current Ratio Quick Ratio Total Debt Ratio Debt to Equity Ratio Inventory TO Days Sales in Inventory Receivables TO Days Sales in Receivables Profit Margin 17.5% 11.0% 16.0% ROA 12.7% 8.2% 11.8% ROE 36.7% 21.0% 33.0% P/E Ratio Current = Industry = 17.4 Dividend Yield Current = 2.6% Industry = 1.6% Figure 1. Financial Ratios for 2009, 2010, 2011 Fiscal Years

8 Convery 8 Figure 2. Baxter International Revenues (in billions) Baxter International is a revenue generating machine. In the 2011 fiscal year, they had their best year to date. They have continually improved their total revenues throughout the past 6 years billion dollars blows the industry average of 47 million out of the water. However, after calculating the profit margin, they seem to have had run into some adversity in Their profit margin dropped seven percent from 2009 to 2010, but did bounce back with a strong 16 percent in This could suggest that 2010 was a year that involved greater investment and expansion, which led to more expenses and less net income. The quick and current ratios give investors an idea of liquid the company s assets are. Both Baxter s quick ratio and current ratio follow the same trend from 2009 to However, the difference is that the quick ratio does not include the company s inventory. Generally, the higher the ratio the more liquid that firm is. Baxter found itself to be more liquid in 2010 than in 2009 or This depicts them having the most current assets per current liabilities in The total debt ratio indicates what proportion of debt a company has relative to its assets. Since Baxter s total debt ratio is less than 1 all three years, they have more assets than debt. In 2009 their total debt ratio was 0.586, whereas in 2011 it was This indicates that Baxter

9 Convery 9 International is taking on more and more debt over the past few years. Debt is not always a bad thing, as long as the company is using it to effectively grow their business and increase shareholder wealth. Another positive trend that stood out when analyzing these ratios was the decrease in Days Sales in Receivables. Going from almost 67 in 2009 to nearly 63 in 2011 indicates Baxter is collecting their receivables on average 4 days quicker. This is crucial because accounts receivable is a very valuable asset. No trend was spotted when calculating the company s Inventory Turnover is about average for this industry because medical supplies and most fluids are non-perishable. If Baxter was in the produce business, their Inventory Turnover would be completely different. A firm s Return on Assets (ROA) indicates how profitable a company is relative to its assets. According to the financial data, management was more efficient in using its assets in 2011 than However, they best ROA was in 2009 at 12.7%. On the other hand, Return on Equity (ROE) measures a corporation s profitability by revealing how much profit a company generates with the money shareholders have invested. Baxter s ROE follows the same trend the ROA does. The 2010 fiscal year was the lowest 21.0%. In 2011, they bounced back with an impressive 33.0% Return on Equity. Stock Valuation & Risk Currently Baxter s stock is selling at a price of $68.17, but is projected to by around $71.07 one year from today. The stock has a P/E Ratio of This is very similar to the industry average of The P/E is simply the price of the stock divided by the earnings per share. When evaluating a stock is is also important to look at what the dividend yield is. Baxter

10 Convery 10 has a solid yield of 2.6% or 1.80 per share. The industry average dividend yield comes in at a dismal 1.6% of the stock s price. Investing in a stock comes with great risk. Therefore it is best to analyze every trend and the volatility of your potential investment. The chart below depicts the steady, continuous incline of Baxter International s stock price. Figure 3. BAX Stock Price Over the Past 6 Months One method of measuring a stock s volatility and risk is to look at its beta value. High beta stocks come with greater amounts of risk, but provide a potential for higher returns. Baxter has a fairly low beta of 0.74 suggesting that there is not a great deal of risk involved, but possible lower returns. Therefore, Baxter would be a safe bet for consistent and steady return.

11 Convery 11 Debt Policy Baxter International boasts an A+ bond credit rating. This is a great rating that is extremely appealing to future investors. They have financed the majority of their company through equity instead of debt. Currently they have 7.1 billion dollars in shareholder equity. Whereas, only 6.0 million dollars in debt has been issued. A few important numbers have been listed below. Growth Rate = 8.5% Tax Rate = % 10-Yr Treasury Yield = 5.0% Bond Spread Treasury = 1.5% Company WACC = 6.95% Baxter has a weighted average cost of capital (WACC) of 6.95%. Each category of capital is proportionally weighted when calculating this useful number. A company s WACC is often used by managers to determine the economic feasibility of expansion and possible mergers. Summary All in all, Baxter International Inc. has proved itself year after year as being a great investment. I personally recommend buying this stock based on its sustainable practices, financial performance the past few years, and its low volatility with a solid return. There is no sign of slowing down in Baxter s future, so buying as quickly as possible would be ideal as the stock price will probably continue to rise. This is not necessarily a stock you buy to make huge

12 Convery 12 dividends in a short amount of time. However, it would be a wonderful asset to anybody s portfolio over a little bit longer period of time. When evaluating a stock, one must not only consider its financial performance, but also what the company is doing behind the scenes. Baxter is making all the right moves with its emphasis on research and development. Creating new vaccines and treatments is what will keep this prosperous company atop its industry for many years to come.

13 Convery 13 Appendix Ratio Current Ratio Quick Ratio Total Debt Ratio Debt to Equity Ratio Inventory TO Days Sales in Inventory Receivables TO Days Sales in Receivables Profit Margin 17.5% 11.0% 16.0% ROA 12.7% 8.2% 11.8% ROE 36.7% 21.0% 33.0% P/E Ratio Current = Industry = 17.4 Dividend Yield Current = 2.6% Industry = 1.6% Figure 1. Financial Ratios for 2009, 2010, 2011 Fiscal Years Revenues (in billions) $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 $10.4 $11.3 $12.3 $12.6 $12.8 $ Figure 2. Baxter International Revenues (in billions)

14 Figure 3. BAX Stock Price Over the Past 6 Months Convery 14

15 Convery 15 Bibliography "Weighted Average Cost Of Capital." Investopedia. N.p., n.d. Web. 17 Feb < "Beta: Know The Risk." Investopedia. N.p., n.d. Web. 17 Feb < pedia.com/articles/stocks/04/ asp>. "Summary for Baxter International Inc." Yahoo! Finance. N.p., n.d. Web. 17 Feb < "Baxter to Initiate Late-Stage Clinical Trial of BAX 855 for the Treatment of Hemophilia A." Yahoo! Finance. Yahoo!, n.d. Web. 17 Feb < "Baxter Reports Record Sales, Earnings and Cash Flow for Full-Year 2012." Yahoo! Finance. Yahoo!, n.d. Web. 17 Feb < "Debt, Bond, & Credit Rates." Baxter International Inc. Morningstar, n.d. Web. 17 Feb < "Baxter International Inc." Income Statement for (BAX). Morningstar, n.d. Web. 17 Feb < "Baxter Sustainability Report." Baxter Sustainability Report. Baxter, n.d. Web. 18 Feb <