Options Trade - Baxter International Inc. (NYSE:BAX) Calls
Tuesday, October 21, 2014

**OPTIONS TRADE: Buy the BAX Feb 2015 70.000 call (BAX150220C00070000) at or under $1.50, good for the day. Place a protective stop loss at $0.60 and a pre-determined sell at $3.00.

by Ian Harvey

October 21, 2014

Introduction

Baxter International Inc. (NYSE: BAX), a global, diversified healthcare company, has posted a nearly 6.0% rise in adjusted net earnings to $720 million or $1.31 per share for the third quarter of 2014 from $681 million or $1.24 per share in the same quarter a year back. With this, earnings per share fell within the company’s previously issued guidance of $1.28 to $1.32 and met the Consensus Estimates. Analysts are crediting this upside surprise to “strong growth in the U.S. market.”

Another positive factor for Baxter International Inc. is the panic emerging from the ebola scare. Baxter International is a medical “pick and shovel” stock that provides hospitals many of the workday tools required to deal with major infectious outbreaks. If there is a need, in the future, for the creation of robust isolation wards BAX is certainly well positioned.

Technical Details

Baxter International has a one year low of $64.78 and a one year high of $77.31. The stock has a 50-day moving average of $72.41 and a 200-day moving average of $73.88. The company has a market cap of $36.422 billion and a price-to-earnings ratio of 19.94.

The market’s broad “Ebola Sell-Off” has positioned BAX at the bottom line of its long-term trend. Of particular interest is the bowl formation in MACD’s histogram. Over the past 30 months, this combination has yielded two sizable rallies — 56.7% from summer 2012 to summer 2013, and 26.1% from fall 2013 to summer 2014. With another rally emanate, BAX is likely to return to its October high at $73.55, or higher..

Earnings

Baxter International released positive third quarter results before market opened on October 16. Reported earnings beat analysts’ expectations, while revenues were in line with the Street’s estimate and were driven by high medical devices sales from the recently acquired Gambro AB division. However, the healthcare company revised down the earnings forecast for the full year due to the divestiture of its Vaccines portfolio.

Baxter reported its topline at $4.2 billion, reflecting a year-over-year (YoY) growth of 13%, in-line with analysts’ forecasts and the company’s guidance. Revenues for the first nine months of 2014 now stand at $12.2 billion, up 15% YoY.

Sales from the US market, which makes up 42% of total sales, came out at $1.8 billion, up 7% YoY. Sales from all other markets totaled $2.4 billion, reflecting a growth of 18%.

Baxter has two segments, Medical Products and BioScience. Medical Products generated $2.5 billion in revenues, up 17% YoY. This segment includes the renal medical devices that were added to the company’s portfolio following the acquisition of Gambro in November last year. The BioScience division, which will be separated into a public entity by the name of Baxalta early next year, reported sales of $1.7 billion, up 8% YoY.

Adjusted earnings for the 13-week period came in at $1.35, compared to $1.19 in the comparable period last year. Earnings beat analysts’ estimate of $1.30, as well the company’s own guidance of $1.28-1.32. This is the fourth quarter in a row when Baxter beat analysts’ earnings expectations. Net income for the quarter was $741 million. Earnings for the nine-month period amounted to $3.81, up 8%YoY.

Baxter has projected sales growth of 3%, which implies $4.53 billion in sales. It expects earnings per share (EPS) to be between $1.30-1.33. Analysts, on the other hand, have predicted revenues of $4.38 billion and adjusted earnings of $1.4.

The company decreased earnings guidance for the full year from $5.1-5.2 to $4.86-4.89. The decrease is based on the divestiture of its Vaccines portfolio, which was bought by Pfizer Inc. (PFE) for $635 million in July this year. The deal is expected to be completed in 4Q. The Street expects earnings for the year to be $5.165 per share.

Revenue growth for the year has been revised up from 10-11% to 11-12%. This suggests sales of $17.09-17.24 billion. Analysts have forecasted revenues for the year to be $16.82 billion.

Continued Growth

There is still a bull theme on Baxter for a couple of reasons:-

On the one hand, Baxter continues to see exponential growth in its core medical products business. Specifically, sales climbed 17 percent to $2.5 billion this quarter, reflecting the growing demand for elective and non-elective procedures as aging populations increase medical commodities. This favorable demographic trend should, in theory, increase the demand for Baxter's medical products going forward.

On the other hand, an ongoing concern regarding Baxter's post-spin-off growth prospects is somewhat alleviated as a result of Baxter's new lucrative deal with Rockwell Medical (NASDAQ:RMTI), for the development of Rockwell's hemodialysis concentrates and ancillary products - all of which should bolster Baxter's dialysis franchise. Nevertheless, it is suspected that Baxter will still necessitate alternative sources of revenue to compensate for the Baxalta spin-off. Thus, it is anticipated that Baxter will continue pursuing strategic acquisitions that expand its core business portfolio, which offer shareholders continued opportunities for share price appreciation.

Analysts Opinions

Baxter International‘s stock had its “outperform” rating restated by Credit Suisse in a research note issued last Friday. They currently have a $77.00 price target on the stock, down from their previous price target of $80.00. Credit Suisse’s price target suggests a potential upside of 14.52% from the company’s current price.

The company has also been the subject of a number of other research reports:-

• Analysts at Barclays reiterated an “overweight” rating on shares of Baxter International in a research note on Friday. They now have an $83.00 price target on the stock, down previously from $88.00.

• Separately, analysts at RBC Capital cut their price target on shares of Baxter International from $78.00 to $72.00 in a research note on Friday. They now have a “sector perform” rating on the stock.

• Finally, analysts at Morgan Stanley reiterated an “equal weight” rating on shares of Baxter International in a research note on Monday, October 13th. They now have a $75.00 price target on the stock, down previously from $80.00.

Five research analysts have rated the stock with a hold rating and eight have issued a buy rating to the company’s stock. Baxter International has a consensus rating of “Buy” and an average price target of $79.73.

Conclusion

For the fourth quarter of 2014, Baxter expects revenues to grow by 3%, barring the impact of foreign currency. The company also expects adjusted earnings in the range of $1.30 to $1.33 per share for the quarter. The current consensus estimate of $1.33 coincides with the upper-end of the guided range. For full year 2014, Baxter now expects higher revenue growth of 11 to 12%, up from the prior range of 10 to 11%, excluding the impact of foreign exchange. Baxter seems to be firing on all cylinders.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the BAX Feb 2015 70.000 call (BAX150220C00070000) at or under $1.50, good for the day. Place a protective stop loss at $0.60 and a pre-determined sell at $3.00.



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