Nearly all of America (and the world) are familiar with Al Gore — but what do you know about his fund: Generation Investment Management?
At last glance, Al Gore’s 13F portfolio value increased $250,000,000 from $23.86 billion to $24.11 billion.
His top five stakes?
- Baxter International Inc. (BAX),
- Cisco Systems,
- Amazon.com, and
These account for approximately 29% of Generation’s total 13F quarterly portfolio — and of that, Baxter is the largest position, accounting for around 7%.
Baxter has a trading range between $70 and $90 but a discounted cash flow forecast analysis pegs its fair market value at $106 per share, representing significant upside.
Can those numbers be trusted? What does the future hold for this stock?
Baxter Business Model
Baxter is an American healthcare company that was first founded in 1931. The company first made its mark through IV therapy solutions, but today its portfolio of healthcare products and solutions is vast. From nutrition therapies to dialysis therapies, injectable pharma to inhaled anesthetics, the company reported $11.7 billion during the worst of the health crisis.
Chairman, President, and Chief Executive Officer, José (Joe) E. Almeida, said, “Our 2020 performance demonstrates the underlying strength of our portfolio, as well as our heightened agility and resilience.”
In November 2021, Baxter published data indicating that its digital platform for home dialysis, Sharesource, may improve survival rates by nearly two times as well as reduce hospitalizations. This data was presented at the American Society of Nephrology’s annual Kidney Week. This is just one example of how heavily involved Baxter is within both the American and global healthcare industries.
Baxter has what you would consider a niche market business model, targeting a specialized consumer segment. The company sells its products through direct sales, pharmacies, independent distributors, and drug wholesalers. With operations in Europe, North America, Asia-Pacific, the Middle East, and Africa, Baxter is known for its ability to grow through innovation.
As 2022 kicks off, BAX is trading well below fair value of $106 per share. It has a lower PE ratio compared to the U.S. Medical Equipment industry average. With a forecasted annual earnings growth of nearly 13%, BAX’s dividends in three years are expected to be well covered by earnings.
While it has underperformed the S&P 500 over the past year, the team at Generation have a storied history of outperforming the market and it’s an extraordinary vote of confidence that they invested close to $1.5 billion in Baxter alone.
Does Baxter Make Money From Covid?
Although Baxter is a significant player in the healthcare industry, the company does not offer COVID-19 vaccines nor anything within that realm.
Regardless, Baxter has continued to show resilience throughout the pandemic, adapting to the needs of patients and healthcare companies around the globe. Certain segments have shown positive growth, including renal care, pharmaceuticals, advanced surgery, medication delivery, clinical nutrition, and acute therapies.
The company continues to release new products — both physical and digital, with many strategists liking its moat. Although many view Baxter’s moat as narrow the company continues to focus on injectable therapies and dialysis, and it delivers solutions through complex, highly innovative systems. Baxter can claim top-tier positions across its product lines, making it difficult for new firms to penetrate these niches.
Among some of the highlights of 2020 and early 2021, the company:
- Increased manufacturing capacity to address surging demand
- Completed agreements to provide sterile manufacturing services for COVID-19 vaccines
- Announced FDA clearance of the Homechoice Claria system, a simple user interface that combines with Sharesource, the only two-way remote patient management platform for dialysis patients in the United States
- Acquired toSense, a technology company that develops sensors and software for non-invasive patient monitoring
- Was granted FDA approval for new formulations of Clinimix
While reviewing Baxter’s history, the company has traded as high as 28X P/E. And while BAX isn’t an investment for everyone, it sure is catching the attention of some of the most renowned investors at Generation Investment Management.
Of note, the annual dividend rate was $1.12 per share of common stock. It is expected that, based on Baxter’s conservative payout ratio, the current dividend looks sustainable.
So, What Are the Risks?
Yes, BAX is trading at over well below its estimated fair value, with healthy earnings forecasted per year. However, the risk analysis shows that:
- A relatively unstable dividend track record, as dividends were cut at least once in the past. However, most experts are not concerned moving forward. As reported in August 2021, Baxter paid out 46% of its profit last year, distributing 37% of its free cash flow as dividends.
- Large one-off items impacting financial results. Again, most are not concerned about Baxter’s narrow moat, simply because they are leaders in the niches they continue to focus on. Baxter’s international earnings have increased by 25% per annum for the last five years.
Should You Buy Baxter International Stock?
Baxter has generated significant returns over the past five years or so, showcasing consistent product innovation. The company also has a wide portfolio of products and services, remaining highly competitive in major niches.
Baxter stock prices have indeed retreated in recent years because of a decline in investor interest, but now may be the time to buy the dip based on Baxter’s projected growth and value?
Revenue is expected to increase and profits should be rewarded by Wall Street soon after.