Baxter International (BAX) stock climbed 1.7 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Baxter International's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.
Baxter International Inc., through its subsidiaries, develops and provides a portfolio of healthcare products worldwide. The large-cap Health Care company is based in Deerfield, United States and has 60,000 full time employees.
BAX Has a Higher P/E Ratio Than the Sector Average
Compared to the Health Care sector's average of 24.45, Baxter International has a trailing twelve month price to earnings (P/E) ratio of -9.1 and an expected P/E ratio of 13.6. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $-4.99 or forward earnings per share of $3.33.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Baxter International's P/E ratio is higher than its sector average of 24.45, we can deduce that the market is overvaluing the company's earnings.
Baxter International Is Overvalued in Terms of Expected Growth
Baxter International's PEG ratio is 8.67. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Baxter International's case, it tells us the company is overvalued.
BAX Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Baxter International, the P/B value is 3.89 while the average for the Health Care sector is 4.16.
BAX Is Generating Cash
Baxter International has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of -12.9%, compared to -0.6% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of -21.6% and a coefficient of variability of 37.6%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 1,211,000 | -679,000 | 532,000 | -64.03 |
| 2021-12-31 | 2,222,000 | -743,000 | 1,479,000 | 27.61 |
| 2020-12-31 | 1,868,000 | -709,000 | 1,159,000 | -17.68 |
| 2019-12-31 | 2,104,000 | -696,000 | 1,408,000 | n/a |
Baxter International Is Not a Profitable Business
If you are looking to make BAX a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Baxter International's management may be able to make the business profitable in the future.
Baxter International's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 15,113,000 | 9,716,000 | 35.71 | -10.57 |
| 2021-12-31 | 12,784,000 | 7,679,000 | 39.93 | 1.6 |
| 2020-12-31 | 11,673,000 | 7,086,000 | 39.3 | -6.21 |
| 2019-12-31 | 11,362,000 | 6,601,000 | 41.9 | n/a |
Baxter International's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 15,113,000 | 4,528,000 | 5.75 | -57.03 |
| 2021-12-31 | 12,784,000 | 3,395,000 | 13.38 | -3.32 |
| 2020-12-31 | 11,673,000 | 2,971,000 | 13.84 | 79.51 |
| 2019-12-31 | 11,362,000 | 3,885,000 | 7.71 | n/a |
Baxter International's cost of revenue is growing at a rate of 10.1% in contrast to 3.9% for operating expenses. Sales revenues, on the other hand, have experienced a 7.4% growth rate. As a result, the average gross margins growth is -3.9 and the average operating margins growth rate is -7.1, with coefficients of variability of 6.6% and 39.9% respectively.
We See Mixed Market Signals Regarding BAX
Baxter International has an average rating of hold and target prices ranging from $58.0 to $45.0. At its current price of $45.2, the company is trading -10.87% away from its target price of $50.71. 1.1% of the company's shares are linked to short positions, and 84.0% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-03-31 | Blackrock Inc. | 13% | 63,463,767 | $2,868,562,316 |
| 2023-03-31 | Vanguard Group, Inc. (The) | 12% | 60,794,820 | $2,747,925,910 |
| 2023-03-31 | State Street Corporation | 4% | 21,284,408 | $962,055,257 |
| 2023-03-31 | Morgan Stanley | 3% | 13,022,319 | $588,608,828 |
| 2023-03-31 | Macquarie Group Limited | 2% | 9,238,991 | $417,602,400 |
| 2023-03-31 | Price (T.Rowe) Associates Inc | 2% | 9,196,775 | $415,694,237 |
| 2023-03-31 | Geode Capital Management, LLC | 2% | 8,971,166 | $405,496,710 |
| 2022-12-31 | Norges Bank Investment Management | 1% | 7,439,184 | $336,251,122 |
| 2023-03-31 | T. Rowe Price Investment Management, Inc. | 1% | 7,204,767 | $325,655,473 |
| 2023-03-31 | State Farm Mutual Automobile Insurance Co | 1% | 6,853,390 | $309,773,233 |
