Baxter International – With Volatility Like This We All Need Drugs

Baxter [NYSE:BAX - $41.82] has dropped back over 32% from its 2010 high of $61.88 due to reduced guidance related to Obamacare costs and lower than expected plasma sales. Even so, full-year EPS are still expected to hit an all-time high. 

Baxter has been a very consistent grower but has shown occasional down years. A peak earnings year in 2002 saw BAX shares hit $59.90 before a disappointing 2003 outlook took the shares down to $24.10. Astute buyers near that point watched BAX go on a multi-year run which topped out in 2008 above $71. The current pullback may turn out to be a similar opportunity.

Here are Baxter’s per share numbers (excluding non-recurring items) as reported by Value Line:

Zacksand Standard and Poors are each looking for about $3.93 and $4.26 in EPS for 2010 and 2011 respectively. That puts Baxter’s multiples at 10.7x current year’s and about 9.8x next year’s estimates. Just a quick glance at the chart shows how cheap those are historically.

The $0.29 quarterly dividend represents a 2.77% current yield – almost double the typical rate from the past decade. It’s also more than most 2 – 3 year bank CDs pay in today’s near zero interest rate environment. That alone should provide some support for the stock at today’s closing price.

Value Linetakes a very conservative view in using a 14 multiple to figure a 3 – 5 year goal price range of $75 – $90 with assumed earnings of $6.00 /share. Even 14x this year’s estimate would see BAX shares bounce back to the $55 range. That’s 31.5% above the present quote.

Is that a reasonable goal? Standard and Poors thinks so. Their ‘Fair Value’ for BAX is $55.80 although they only assume a 12-month target price of $50 – still about 20% higher than the $41.82 closing trade.

Is Baxter a high-risk stock? Nope. Value Line rates their financial strength as ‘A++’ and their safety in their highest classification. ‘Stock price stability’ and ‘earnings predictability’ come up big as well with 95^th and 85^th percentile rankings (with 100^th being best). Beta is low at 0.65.

Downside? There are always unexpected risks but at $41.82 BAX now trades at below the absolute lows of 2007-2008-2009. The incredible market melt-down oflate 2008 through March 9, 2009 makes that especially noteworthy.

Baxter appears to offer very limited risk with upside of at least 20% – 30% on top of its 2.77% yield. I’m a buyer.

Option savvy traders may want to consider writing (selling) some LEAP puts for 2011 and/or 2012 to lock in even lower potential purchase prices and an additional margin of safety.

Here are some good looking puts and their prices:

 All the above could easily expire worthless at expiration if my reasoning is sound. If ‘put’ you’d be getting in at multi-year lows with an even higher yield than available today.

Dr. Paul Price –  May 24, 2010

 www.BeatingBuffett.com

Disclosure: Author is long BAX shares and short BAX options.