|
Published: August 2, 2010
An easy way to make money in the market is
to buy a stock that has been beaten down due to short-term
worries. Of course the rub is discerning whether the problem is
indeed temporary. But there is considerable upside to
identifying a setback that will not permanently impair a
company's fortunes over the long haul.
In the healthcare space, anytime you hear talk about product
recalls or manufacturing woes, it's worth investigating. These
setbacks tend to kill positive investor sentiment. Product sales
can also become weak for short-lived reasons, be it a temporary
oversupply issue or a weak pricing environment. The key is
finding a stock that's likely to overcome these short-term
hurdles.
Baxter International (NYSE: BAX) is suffering from a lot
of these issues, but the stock could rise at least +50% as the
market realizes the company's appealing growth prospects across
the globe.
Back in May the FDA ordered Baxter to recall its Colleague
infusion pumps. The pumps don't account for much of the
company's revenue and the company has already reserved nearly
$100 million for recall expenses, but this could open the door
to future product
liability litigation and has resulted in quite a bit of
negative publicity. Baxter is also suffering from weak demand
for products related to its plasma franchise, which is used to
treat hemophilia and related blood disorders, leading to falling
prices.
It wasn't that long ago that the Chicago-based company was
regularly beset by manufacturing issues and the wrath of FDA
inquiries into its facilities. In fact, the frequent occurrence,
or recurrence of these issues qualified as a big competitive
disadvantage.
Conditions have stabilized in recent years; stemming from the
appointment of Robert Parkinson as CEO in 2004. Parkinson is
credited with instilling a more shareholder friendly culture at
Baxter, which he learned as chief operating officer at in-town
archrival Abbott Labs (NYSE: ABT).
The proof of his success is in the performance figures. Despite
industry headwinds during the past five years, not to mention
the cloud left by healthcare reform, Baxter's share price is up
nearly +20%, compared to Abbott's single digit performance and
negative returns from many competing healthcare providers -- and
the overall market -- during this time frame. The stock has
largely followed fundamentals, as management has leveraged mid
single digit annual sales growth into earnings growth exceeding
+40% each year.
Given the steady trends of the recent past,
current production issues can be written off as a short-term
blip. Baxter even has a couple of years to take care of the
recall and replace any faulty pumps and issue refunds to
affected owners. This will allow the company to minimize
short-term disruptions to its business and profitability as it
spreads out any costs over a longer time period.
The plasma-based franchise, could take longer to work out its
issues, but the business is stable. Patients need treatment no
matter the economic climate. Plus, sales have grown
double-digits in each of the last two full years and further
illustrates the growth potential in this business.
In its most recent financial release, Baxter said it expected
+1% to +3% sales growth and diluted earnings between $3.93 and
$3.98 per share, equating to year-over-year growth of about
+10%. That places the forward P/E at just over 11 times
earnings. The valuation hasn't been this low since 1994 -- the
same year the Clinton administration failed to implement its
major healthcare overhaul. And just for the record: Baxter's
share price has more than tripled since then.
It may have taken decades, but the Democrats finally succeeded
in their quest for a major healthcare overhaul. The fact that
the reforms were enacted this time around is somewhat of a
negative weighing on the industry, but it should inevitably help
Baxter as millions more patients enter the system.
Action to Take ---> Coupled
with the other temporary setbacks, Baxter's shares are
significantly undervalued and could rise at least +50% as
Baxter's earnings multiple expands and profits continue to grow
at an impressive clip. Short-term pain could easily turn into
long-term gain when it comes to this compelling healthcare play.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
