Thursday, January 27, 2011

Baxter offers long term value with a margin of safety

I believe $BAX, at approximately $49/share offers value with a margin of safety on a cash flow valuation basis.

Baxter International focuses on delivering injectable therapies for a wide variety of medical conditions. The firm's BioScience segment specializes in developing treatments for disorders such as hemophilia and immune deficiencies. It also provides a variety of medication delivery systems including intravenous bags, solutions, and other devices to control fluid inflow, including dialysis equipment and solutions for patients with kidney failure.

Baxter Reports Sales and EPS for Fourth Quarter 2010 in Line with Guidance
I estimated the firm's WACC at 7.69% using the Capital Asset Pricing Model and the company's recent SEC filings.  ValuePro has a baseline WACC calculator here and it calculates the firm's WACC at 6.83%.  I'll go with the higher mark, 7.69%.  

Recent free cash flows and noted growth rates:
YearFCF $Millions
Average Annual Growth: approx 18%
CAGR: approx. 14%
Consensus Forecast Industry 5-Year Growth: approx. 16% per year
Consensus Forecast Company 5-Year Growth: approx. 10% per year
Assume the company achieves a slightly lower 5-year growth rate of 9% per year, and assume that after the next five years, the company achieves no growth or 0% growth per year forever.
Discounted Cash Flow Valuation:
YearFCF $ Millions
Terminal Value44468
The firm's future cash flows, discounted at a WACC of 7.69%, give a present value for the entire firm (Debt + Equity) of $41,274 million. If the firm's fair value of debt is estimated at $5,500 million, then the fair value of the firm's equity could be $35,774 million.
$35,774 million / 583 million outstanding shares is approx $61 per share. A 20% margin of safety from here is approx $49 so assuming all else meets my standard for good business, I'd buy $BAX today for the long term at $49 or less.  I believe $BAX offers value with a margin of safety on a cash flow valuation basis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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