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.
(Source: Morningstar.com)

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
2000566
2001362
2002345
2003636
2004822
20051106
20061657
20071613
20081561
20091895
20102040
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
02040
12224
22424
32642
42880
53139
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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