"Baxter International (BAX) Stock: A Hidden Value Trap? Unpacking the Risks and Rewards"
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Baxter International Inc (NYSE:BAX). The stock, currently priced at 31.17, recorded a loss of 2.1% in a day and a 3-month decrease of 32.28%. The stock's fair valuation is $95.34, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Baxter International should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.48. These indicators suggest that Baxter International, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
What is the Altman Z-score?
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Overview
Baxter International Inc (NYSE:BAX) offers a variety of medical instruments and supplies to caregivers. It enhanced its portfolio of hospital-focused offerings by acquiring Hillrom in late 2021, which added basic equipment, including hospital beds, to the portfolio, although about half of Hillrom's revenue comes from more digitally connected offerings like its smart beds and Voalte medical communications app. From its legacy operations, Baxter offers tools to help patients with acute and chronic kidney failure, which it plans to spin off in 2024. It also sells a variety of injectable therapies for use in care settings, such as IV pumps, administrative sets, and solutions; nutritional products; and surgical sealants and hemostatic agents.
Baxter International's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Baxter International's Altman Z-score reveals Baxter International's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Baxter International's historical data, 2021: 0.85; 2022: 0.54; 2023: 0.49, we observe a declining trend in this ratio. This downward movement indicates Baxter International's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Baxter International's EBIT to Total Assets ratio from historical data (2021: 0.08; 2022: 0.04; 2023: -0.09) indicates a descending trend. This reduction suggests that Baxter International might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
When it comes to operational efficiency, a vital indicator for Baxter International is its asset turnover. The data: 2021: 0.62; 2022: 0.51; 2023: 0.52 from the past three years suggests a decreasing trend in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Baxter International's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion
Despite its seemingly attractive valuation, Baxter International (NYSE:BAX) might be a potential value trap, as indicated by its low Altman Z-score. This complexity underlines the importance of thorough due diligence in investment decision-making. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
This article first appeared on GuruFocus.
