Healthcare stock Baxter International to split in two

In mid-2015 Baxter will split into two companies. One will focus on medical products for healthcare solutions; the other on developing and marketing biopharmaceuticals.

On March 9, there was an anniversary of sorts: the sixth year of the current bull market. And an uneven bull it’s been. Although the S&P 500 Index has more than tripled, the S&P/TSX Composite has only doubled.

Still, doubling one’s investment over six years implies an annual average rate of return of more than 12 per cent — a solid payback by any stretch of the imagination.

Indeed, in reference to the Toronto market, Elvis Picardo, portfolio manager and vice-president, research, at Global Securities Corp. in Vancouver, acknowledges that he says “only doubled” with tongue in cheek, since he is comparing it to the S&P 500. Mr. Picardo continues:

Yet, Toronto’s underperformance is a dilemma for Canadian investors. On the one hand, it’s a bad time to load up on U.S. stocks, given the loonie’s decline against the greenback over the past year, as well as the all-time highs U.S. market indexes have hit.

On the other hand, the TSX has largely shaken off its 2,000-point slump from the fourth quarter, now that oil prices show signs of stabilizing. Indeed, the index is just a few hundred points below its record high.

And although energy and commodities have fueled the rebound, the two sectors still offer some of the best value propositions in the Canadian stock market.

But there’s a problem: both sectors have taken a big hit over the past year or so. So, investors are understandably wary of piling back into beaten-down stocks, despite their attractive valuations. After all, there’s always the fear these bargains could turn out to be value traps.

So what’s a confused Canuck to do? Well, for starters, he should forget about trying to pick out the best stocks in those sectors that might outpace the broad market over the coming year — a tough thing to do anyway at this stage.

Instead, he should look for stocks for which there’s a catalyst on the horizon, or that enjoy a unique niche in North America. By putting this into practice, we were able to screen out several interesting stocks, one of which we highlight here.

Baxter International Inc. (NYSE─BAX), a diversified healthcare solutions provider is also one of the 13 constituents of the S&P 500 Health Care Equipment index. Although the index has surged 164 per cent since March 2009, Baxter has trailed it by a huge margin, having gained only 37 per cent over the same time.

But Baxter may play catch-up in the months ahead, as it has an important catalyst on the horizon. In mid-2015, Baxter will split into two companies, one of which will focus on medical products for healthcare solutions; the other, on developing and marketing biopharmaceuticals.

The split follows an industry trend in which such top healthcare stocks as Abbott Laboratories, (NYSE─ABT), Pfizer Inc. (TSX─PFE) and Bristol-Myers Squibb Co. (NYSE─BMY) have successfully sold, spun off or split their businesses.

Moreover, such moves have generally given shareholders handsome rewards. In 2014, Baxter’s revenue rose 11 per cent (13 per cent excluding foreign exchange transactions) to US$16.7 billion.

Its bioscience division saw revenue rise eight per cent to US$6.7 billion, while its medical products business saw sales climb 16 per cent to US$10 billion. Most of the increase for the latter was fueled by Baxter’s US$4 billion purchase of Gambro AB, a Swedish provider of dialysis products, in 2013.

Last year, Baxter generated operating cash flow of roughly US$3.2 billion, about the same as in 2013. But its net income jumped 24 per cent to US$2.5 billion, or $4.56 a share.

Baxter also raised its quarterly dividend for the eighth year in a row, hiking it six per cent to $0.52 a share, giving the stock an indicated yield of just over three per cent.

True, the stock, in recent weeks, has been weighed down by the company’s tepid guidance for the first quarter of 2015. Excluding foreign exchange transactions, Baxter expects sales to grow by only two to three per cent; including foreign exchange, by roughly three to four per cent.

Net income, meanwhile, is expected to range from US$0.85-$0.90 a share, reflecting seasonality, as well as higher manufacturing and operating costs. Net earnings are also expected to take a hit from fiercer competition from the makers of generic drugs.

Admittedly, all these things will hurt this healthcare stock over the short term. But shareholders should benefit from the higher value the two stand-alone companies are likely to get.

So, Baxter shares are now a compelling buy for long-term investors, despite the stock’s year-to-date decline of seven per cent. 

 

Investor’s Digest of Canada, MPL Communications Inc.
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