Jho Low on Baxter International Inc.

The Wharton  Journal of 26th of February 2001 carried an analysis of Baxter International Inc. by Taek Jho Low, then an undergraduate student at the Wharton School of Business.

The analysis by Taek Jho Low follows:

Investment Thesis
Investors get the best of both worlds with Baxter — the liquidity and cash flow of a large-cap hospital supply company as well as the higher-growth, higher-profit profile of a biotech component. Thus, I consider Baxter an appropriate choice for a broad range of investors.

I believe that the perception of Baxter as a mundane hospital supply firm does not recognize the inherent value of its portfolio. The spin-off of its cardiovascular division emphasizes the Bioscience business that may potentially unleash accelerated sales as well as growth in earnings.

Buoyed by sharp growth in Bioscience, Baxter’s cautious management chose to commit to accelerated growth in the year 2000, targeting earnings growth in the mid-teens up from low double-digit previous targets. The addition of another suite to manufacture Factor VIII in the second half of the year (ahead of schedule) will further serve to emphasize the business.

Last year, approximately 142 senior managers borrowed a total of $200 million in personal loans to purchase 3.1 million shares, or 1 percent, of Baxter stock (at $63.63). This voluntary program was intended to align management’s incentives with shareholders’ objectives. A shared investment plan, from 1994 to 1999, coincided with a period of superior results for the company.

The stock is trading at just 21 times my 2001 EPS estimate of $3.45, a 20% discount to other large-cap names in our universe. My sum-of-the-parts valuation suggests that $76 is the current fair price for the stock.

Risks
Chief among the risks to Baxter’s business are its exposure to slow-growing businesses (about 60 percent of sales), volatile history, and the possibility of dilutive acquisitions.