BAXTER INTERNATIONAL INC. $55 (New York symbol BAX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 602.7 million; Market cap: $33.1 billion; Price-to-sales ratio: 2.7; WSSF Rating: Average) makes medical equipment through three main divisions. BioScience (43% of 2008 sales), makes vaccines and drugs; Medical Delivery (37%) makes intravenous equipment and systems; and Renal (19%) makes dialysis equipment. Other products account for the remaining 1% of sales.
Baxter spends about 7% of its revenue on research. The resulting new products should help it maintain its leading position in key markets.
The company is expanding its drug operations, which generate higher profits than its other products. A good example is Advate, a hemophilia drug that contains no human or animal proteins. This greatly cuts the risk of disease. Since its launch in 2004, Advate has claimed 70% of the U.S. hemophilia-drug market.
The company hopes to duplicate Advate’s success with vaccines, particularly influenza shots. Baxter uses fermenting tanks to make its vaccines, which is faster and cheaper than the traditional method of growing the flu virus in chicken eggs. European health regulators have ordered 80 million doses of Baxter’s H1N1 influenza vaccine. Vaccines hold promise for Baxter, but are still a small part of its operations.
Baxter earned $599 million in the three months ended September 30, 2009. That’s up 6.4% from $563 million a year earlier. Earnings per share rose 11.4%, to $0.98 from $0.88, on fewer shares outstanding. These latest earnings exclude an $0.11-a-share charge related to Baxter’s decision to stop developing a new drug-delivery system. It is also phasing out a syringe pump. The year-earlier figure excludes $0.14 a share in unusual charges.
Sales were flat, at $3.15 billion. Higher sales at the BioScience (up 2%) and Medical Delivery (up 1%) divisions offset a 3% drop at the Renal division. Overseas markets account for 60% of Baxter’s sales. The U.S. dollar was higher against most major currencies in the latest quarter, which hurt the contribution of these foreign sales. If you disregard exchange rates, Baxter’s sales would have risen by 6%.
The stock trades at 14.5 times the $3.80 a share that Baxter should earn this year. The $1.04 dividend yields 1.9%. However, Baxter’s overall sales growth will likely remain weak until it launches new medication-delivery pumps and home-dialysis systems in the next year or two.
Baxter is a hold.
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