Is Baxter International (BAX) Too Good to Be True? A Comprehensive Analysis of a Potential ...
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, which is currently priced at $34.19, recorded a loss of 8.39% in a day and a 3-month decrease of 25.31%. The stock's fair valuation is $95.31, as indicated by its GF Value.
Understanding the 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 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.
A Deeper Look into Baxter International Inc (NYSE:BAX)
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 1.56. 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.
Decoding the Altman Z-Score
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 Snapshot: Baxter International Inc (NYSE:BAX)
Baxter offers a variety of medical instruments and supplies to caregivers. It enhanced its portfolio of hospital-focused offerings by acquiring Hillrom in late 2021. Legacy Baxter offers tools to help patients with acute and chronic kidney failure. 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. The company offers contract manufacturing services to pharmaceutical companies. The Hillrom transaction has added basic equipment, including hospital beds, to the portfolio, although about half of Hillrom's 2021 revenue came from more digitally connected offerings like its smart beds and Voalte medical communications app.
Analyzing Baxter International's Financial Health
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
In conclusion, despite its seemingly attractive valuation, Baxter International Inc (NYSE:BAX) exhibits several risk factors that suggest it may be a potential value trap. The company's low Altman Z-Score, declining Retained Earnings to Total Assets ratio, and decreasing asset turnover ratio all point towards possible financial distress and reduced operational efficiency. Therefore, thorough due diligence is highly recommended before making an investment decision.
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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.
