Should You Buy Baxter Stock Around $80?

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We believe that Baxter stock is a good buying opportunity at the present time. BAX stock trades near $81 currently and it is, in fact, down 13% from its pre-Covid high of $93 in February 2020 – just before the coronavirus pandemic hit the world.

BAX stock traded in the range of $70 and $90 levels, with its 52-week high of around $88, and 52-week low of $73. The BAX stock has had a volatile ride over the last couple of months, with its stock declining from levels of above $80 toward the end of July to levels of around $74 toward the end of August, primarily due to the reports of Hill-Rom rejecting its takeover bid of $9.6 billion. However, the stock price later surged back to levels above $80 in early September, after Hill-Rom accepted Baxter’s revised acquisition bid of $10.5 billion. The Hill-Rom acquisition appears to be good for Baxter in the long run, as it offers the addition of connected care offerings to Baxter’s existing portfolio. The transaction is expected to be low double-digit EPS accretive by 2023 and even higher over the subsequent years.

Returning to pre-Covid levels means that BAX stock will have to rise 15% from here, and this will likely materialize in the near term. The reason behind this is primarily the Hill-Rom acquisition. With the pandemic, there has been an increased demand for home-health, and Hill-Rom offers multiple home-care products. This business is likely to expand going forward, and with Baxter’s international footprint, it is likely that Hill-Rom can make in-roads to markets outside of the U.S. Furthermore, with economies gradually opening up, Baxter will also see a rebound in demand for its products with a rise in hospital and surgical volumes. We believe that BAX stock appears to be a good buying opportunity currently. Our conclusion is based on the detailed comparison of Baxter stock during the 2008 recession vs now in our interactive dashboard analysis.

Timeline of 2020 Coronavirus Crisis:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 95% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

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In contrast, here is how BAX stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

BAX and S&P 500 Performance Over 2007-08 Financial Crisis

BAX stock moved up from levels of about $31 in September 2007 (pre-crisis peak for the markets) to levels of $38 in September 2008, and from there it dropped to $28 in March 2009 (as the markets bottomed out), implying BAX stock lost 27% from its pre-crisis highs. It gained 15% post the 2008 crisis to levels of $32 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Baxter Fundamentals Over Recent Years Have Been Robust

Baxter’s revenues grew to $11.7 billion in 2020, compared to just $11.1 billion in 2018. This can partly be attributed to the impact of Seprafilm and Recothrom acquisitions. Looking forward, revenues are estimated to grow to $12.6 billion in 2021, reflecting an 8% y-o-y growth. Looking at the bottom line, the company’s EPS declined slightly to $2.17 in 2020, compared to $2.90 in 2018. On an adjusted basis, the company’s EPS is estimated to be $3.52 in 2021 (consensus estimate), compared to $3.09 in 2020.

Does Baxter Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Baxter total debt increased from $3.5 billion in 2018 to $6.6 billion currently, while its total cash increased from $1.8 billion to $3.1 billion over the same period. Baxter generated $1.9 billion cash from operations in 2020. The company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-September 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Given the recent decline in the number of new Covid-19 cases in the U.S., we expect an improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results and beyond, we believe Baxter stock has the potential for more gains, with the Hill-Rom acquisition and a rebound in procedure volume. Also, Baxter Stock Return summarizes BAX stock performance and chances of its rise or decline, among other metrics that matter.

While BAX stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for IDEXX vs. Vertex. 

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