Stock Analysis

Is Baxter International's (NYSE:BAX) 112% Share Price Increase Well Justified?

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NYSE:BAX
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When you buy a stock there is always a possibility that it could drop 100%. But on the bright side, if you buy shares in a high quality company at the right price, you can gain well over 100%. One great example is Baxter International Inc. (NYSE:BAX) which saw its share price drive 112% higher over five years.

See our latest analysis for Baxter International

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During five years of share price growth, Baxter International achieved compound earnings per share (EPS) growth of 24% per year. This EPS growth is higher than the 16% average annual increase in the share price. Therefore, it seems the market has become relatively pessimistic about the company.

You can see how EPS has changed over time in the image below (click on the chart to see the exact values).

earnings-per-share-growth
NYSE:BAX Earnings Per Share Growth December 31st 2020

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. It might be well worthwhile taking a look at our free report on Baxter International's earnings, revenue and cash flow.

What About Dividends?

It is important to consider the total shareholder return, as well as the share price return, for any given stock. Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off. It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Baxter International, it has a TSR of 123% for the last 5 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

Baxter International shareholders are down 4.2% for the year (even including dividends), but the market itself is up 24%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Longer term investors wouldn't be so upset, since they would have made 17%, each year, over five years. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. It's always interesting to track share price performance over the longer term. But to understand Baxter International better, we need to consider many other factors. Case in point: We've spotted 3 warning signs for Baxter International you should be aware of.

Baxter International is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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What are the risks and opportunities for Baxter International?

Baxter International Inc., through its subsidiaries, develops and provides a portfolio of healthcare products worldwide.

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Rewards

  • Trading at 40% below our estimate of its fair value

  • Earnings are forecast to grow 64.46% per year

Risks

  • Debt is not well covered by operating cash flow

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