Has Baxter International Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Baxter International (NYSE: BAX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Baxter International.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

6.4%

Fail

 

1-Year Revenue Growth > 12%

7.7%

Fail

Margins

Gross Margin > 35%

51.0%

Pass

 

Net Margin > 15%

15.8%

Pass

Balance Sheet

Debt to Equity < 50%

60.7%

Fail

 

Current Ratio > 1.3

1.94

Pass

Opportunities

Return on Equity > 15%

32.2%

Pass

Valuation

Normalized P/E < 20

15.96

Pass

Dividends

Current Yield > 2%

2.3%

Pass

 

5-Year Dividend Growth > 10%

16.3%

Pass

       
 

Total Score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Baxter International last year, the company has seen its score jump by a point. Net margin improvement is responsible for the extra point, and Baxter has also made progress in getting its debt closer to under control.

Baxter remains under the radar in the pharmaceutical and medical-device arenas. With its emphasis on blood-related diseases, dialysis treatment, and drug-delivery mechanisms, the company is well-poised to serve an aging population. Compared to Edwards Lifesciences (NYSE: EW  ) , into which Baxter spun off its former cardiovascular business more than a decade ago, Baxter has given its shareholders a smooth and steady (if unexciting) ride over the past year.

Baxter plays a key role in helping other companies. Amylin Pharmaceuticals (Nasdaq: AMLN  ) relies on Baxter for dosage-form manufacturing help for its Byetta and Symlin drugs. Baxter also helps produce the drug Stimuvax for Oncothyreon (Nasdaq: ONTY  ) and Merck KGaA, and it also helps supply products for Seattle Genetics (Nasdaq: SGEN  ) and United Therapeutics.

From a financial perspective, Baxter has numbers that are fairly close to competitors Medtronic (NYSE: MDT  ) and Abbott Labs (NYSE: ABT  ) , although Abbott has a better dividend and has enjoyed stronger growth recently. Baxter needs to keep working on getting its debt levels down and seek out new growth opportunities. With favorable demographic winds at its back, Baxter could be the rare stock to actually reach perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Baxter International to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Medtronic and Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Abbott Laboratories. 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 Fool has a disclosure policy.


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