Can This Diversified Healthcare Company Keep Investor’s Portfolios Healthy?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would like to pinpoint on a diversified healthcare company, operating in the medical devices, pharmaceuticals, and biotechnology industries, Baxter International Incorporated (NYSE: BAX).

 

Strengths:

  • Stable Revenue Growth: In 2006, Baxter reported revenue of $10.39 billion; in 2011, the company announced revenue of $13.89 billion, representing year over year annual growth of 5.98%, and this stable revenue growth is widely anticipated to sustain into the future, with projections placing 2016 revenue at $17.18 billion (this growth has been a result of increasing sales due to innovative offerings and a growing medical devices market)
  • Dividend: Currently, Baxter pays out quarterly dividends of $0.45, which annualized puts the dividend as yielding 2.63%
  • Institutional Vote of Confidence: 79.74% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Double Digit Margins: At the moment, Baxter possesses a net profit margin of 16.01%, which represents a strong and profitable company; these comfortable margins have been a result of the company’s pricing power and premium offerings
  • Cash & Equivalents: The company presently holds $3.19 billion of cash and cash equivalents on their balance sheets, a major upside to the business
  • Low Volatilely: Baxter currently carries a beta ratio of 0.50, which represents a company trading with less volatilely than the overall market, a major upside for long term investors
  • Geographical Diversification: Baxter’s products are utilized by hospitals, kidney dialysis centers, nursing homes, rehabilitation centers, doctors’ offices, clinical and medical research laboratories, and by patients at home under supervision in over 100 countries, and with this geographical diversification comes a certain level predictability and certainty for investors  

Weaknesses:

  • Debt: The company currently holds about $5.61 billion of debt on their balance sheets, a major downside to the business as this debt load outweighs the company’s cash reserve
  • Pricy Valuation: Baxter presently carries a price to earnings ratio of 16.62, a price to book ratio of 5.83, and a price to sales ratio 2.71, all of which indicate a company trading with a pricy valuation
  • Margin Compression: In 2009, Baxter possessed a net margin of 17.6%; in 2011, the company announced a net margin of 16.0%, however this trend of margin compression is expected to deteriorate into the future, with projections placing 2016 net margins at 18.5%  

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1934, Baxter has consistently raised their dividend payouts, and this trend is widely anticipated to sustain into the future and should provide significant opportunity for shareholders in the future  
  • Product Innovations: Since their founding in 1931, Baxter has consistently prided itself on its innovative nature, providing products and services to the market unmatched, with most recent innovations coming in the fields of kidney disease and select vaccines; and further innovations in the future could fuel sales growth and capture market share  
  • Results from Research & Development Spending: In 2011, Baxter poured $946 million into research and development, and any innovations or new technologies stemming from this investment could provide significant opportunity for the company
  • Acquisitions: In April 2012, Baxter acquired SIGMA International General Medical Apparatus LLC, and further acquisitions in the future could introduce new technologies to the company and fuel growth  
  • Emerging Markets: Emerging markets such as China, India, and Latin America offer substantial opportunity into the future, as medical spending is growing exponentially, and with this increased inheritance of health solutions comes the opportunity for Baxter to capture their share of these markets  

Threats:

  • Competition: The numerous industries Baxter operates in are extremely competitive, and the competition to offer the best product for the least amount of money can lead to margin compression
  • Sluggish Economic Landscape: In sluggish economic landscapes, overall economic spending decreases, and this drop-off in spending could lead to decreased demand for Baxter’s products and services as hospitals are less eager to significantly build up supply reserves and less people have the money to perform major operations in which Baxter’s products are utilized in

Competitors:

Major publically traded competitors of Baxter International include Covidien plc (NYSE: COV), C.R. Bard Incorporated (NYSE: BCR), Hospira Incorporated (NYSE: HSP), and Stryker Corporation (NYSE: SYK). All of these companies operate in the medical devices, pharmaceuticals, or biotechnology industries and compete with Baxter. Covidien is valued at $28.35 billion, pays out a dividend yielding 1.74%, and carries a price to earnings ratio of 15.29. C.R. Bard is valued at $8.47 billion, pays out a dividend yielding 0.78%, and carries a price to earnings ratio of 17.34. Hospira is valued at $5.63 billion, does not pay out a dividend, and carries a negative price to earnings ratio. Stryker is valued at $22.20 billion, pays out a dividend yielding 1.82%, and carries a price to earnings ratio of 15.66.

The Foolish Bottom Line:

Financially, Baxter is relatively solid. The company possesses stable revenue growth, a growing dividend, and a business model producing double digit margins. However, the company carries a debt load which outweighs its cash reserve. Additionally, over the past years margin compression has occurred, a troubling sing, however this trend is expected to stabilize in the future. All in all, Baxter is a diversified health care giant which is perfectly positioned to prosper into the future and should provide solid returns to investors for years to come.  


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Covidien Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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