Before Investing In Baxter International Inc. (NYSE:BAX), Consider This
If you are currently a shareholder in Baxter International Inc. (NYSE:BAX), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through BAX’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
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Is Baxter International generating enough cash?
Baxter International’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Baxter International to continue to grow, or at least, maintain its current operations.
I will be analysing Baxter International’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Baxter International also generates a positive free cash flow. However, the yield of 2.63% is not sufficient to compensate for the level of risk investors are taking on. This is because Baxter International’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Baxter International?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at BAX’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 53%, ramping up from its current levels of US$1.9b to US$2.8b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BAX’s operating cash flow growth is expected to decline from a rate of 29% in the upcoming year, to 6.5% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Baxter International as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Baxter International to get a more holistic view of the company by looking at:
Valuation: What is BAX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BAX is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Baxter International’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
