BAX - Baxter International Inc.

[giofranchi]

Equity Position: Baxter International Inc. (the “Company”)

During the third quarter, we disclosed a 9.9% stake in Baxter International Inc. making us the Company’s largest shareholder. Baxter provides critical, life-saving materials to patients and physicians in over 100 countries with an emphasis on renal care and medical products.

To represent the interests of all shareholders, Third Point Partner Munib Islam joined Baxter’s Board of Directors in September and participated in the search process for the newly appointed CEO, Jose “Joe” Almeida. Mr. Almeida successfully led Covidien as CEO from 2011-2015 before selling the company to Medtronic. The agreement between Third Point and Baxter also required the Company to add a second new member to the Board and we were pleased that the Company attracted Michael Mahoney, the CEO of Boston Scientific, as a new Director. Mr. Mahoney helped revive Boston Scientific when it was confronted with similar opportunities and challenges.

Baxter seems to be at an inflection point for two reasons: (i) the Company recently spun off Baxalta, its biosciences business. As our longtime investors know, break-ups and spinoffs are classic opportunities and Baxter fits this mold; and (ii) we believe that the new CEO can re-invigorate the more focused, post-spin company and drive it toward industry-leading operational performance by following a similar playbook to the one he executed so successfully at Covidien.

Mr. Almeida’s international experience, cost conscious mentality, and strategic vision will be instrumental in helping Baxter accelerate its revival through consistent execution and portfolio reshaping. He has a strong track record of creating shareholder value: during his tenure as CEO from July 2011 to January 2015, Covidien shares rose nearly +140% vs the S&P 500’s +54% return. Given the ample room to drive margin expansion at Baxter and the new CEO’s history of delivering consistent top quartile shareholder returns, we see Baxter as one of the most promising positions in our portfolio.

 

Another good idea by Mr. Loeb?

 

Cheers,

 

Gio

 

[giofranchi]

I have opened a position in BAX.

- Is it a high quality business? Maybe not yet, but it surely has the potential to be. I like the sector of medical devices and I think its future growth is predictable enough.

- Is management great at creating value for shareholders? Mr. Almeida’s track record surely is very interesting and he knows the industry very well. He has been put in place by BAX’s largest shareholder, who evidently has lots of trust and respect for his abilities.

- Is the price attractive? Valuation after a spin-off is very difficult to ascertain, but I like the idea of owning a “special situation” kind of company: if Mr. Almeida is successful in executing his strategy for a more focused company, today’s EPS have little meaning.

Overall, I see the risk of a contraction in the multiple BAX is selling for if nothing good happens, with a huge upside if Mr. Almeida is successful instead.

 

Cheers,

 

Gio

 

[pantheman]

Equity Position: Baxter International Inc. (the “Company”)

During the third quarter, we disclosed a 9.9% stake in Baxter International Inc. making us the Company’s largest shareholder. Baxter provides critical, life-saving materials to patients and physicians in over 100 countries with an emphasis on renal care and medical products.

To represent the interests of all shareholders, Third Point Partner Munib Islam joined Baxter’s Board of Directors in September and participated in the search process for the newly appointed CEO, Jose “Joe” Almeida. Mr. Almeida successfully led Covidien as CEO from 2011-2015 before selling the company to Medtronic. The agreement between Third Point and Baxter also required the Company to add a second new member to the Board and we were pleased that the Company attracted Michael Mahoney, the CEO of Boston Scientific, as a new Director. Mr. Mahoney helped revive Boston Scientific when it was confronted with similar opportunities and challenges.

Baxter seems to be at an inflection point for two reasons: (i) the Company recently spun off Baxalta, its biosciences business. As our longtime investors know, break-ups and spinoffs are classic opportunities and Baxter fits this mold; and (ii) we believe that the new CEO can re-invigorate the more focused, post-spin company and drive it toward industry-leading operational performance by following a similar playbook to the one he executed so successfully at Covidien.

Mr. Almeida’s international experience, cost conscious mentality, and strategic vision will be instrumental in helping Baxter accelerate its revival through consistent execution and portfolio reshaping. He has a strong track record of creating shareholder value: during his tenure as CEO from July 2011 to January 2015, Covidien shares rose nearly +140% vs the S&P 500’s +54% return. Given the ample room to drive margin expansion at Baxter and the new CEO’s history of delivering consistent top quartile shareholder returns, we see Baxter as one of the most promising positions in our portfolio.

 

Another good idea by Mr. Loeb?

 

Cheers,

 

Gio

 

Interesting the S&P was used as the benchmark. IBB was up 203% from Jul 1 2011 to Jan 27 2015. XBI up 176% in the same time frame. Also, and I'm quibbling, but according to my bloomberg charting COV was up only 119% in that time frame, not 140%.

[giofranchi]

Well, I think the growth of the medical devices sector is more in line with the growth of the overall economy than with the growth of the biotech sector... Isn't it?

 

Second, 120% or 140% in 3.5 years... Anything that doubles in less than 5 years is good for me! ;)

 

I am not suggesting the same result will be achieved with BAX. I am only saying that the job done at COV has been quite satisfactory!

 

Cheers,

 

Gio

[Picasso]

I don't know why investors like Loeb try to show success by comparing the stock performance versus an index.  It says nothing about the valuation at the start of the period or the end.  Why not look at growth in free cash flow per share while they were in charge?  Share price change is nearly meaningless. 

 

Gio, is there anything about this stock valuation wise that you find attractive?  Loeb usually talks up his book so I don't take his opinion of quality seriously.

[giofranchi]

I don't know why investors like Loeb try to show success by comparing the stock performance versus an index.  It says nothing about the valuation at the start of the period or the end.  Why not look at growth in free cash flow per share while they were in charge?  Share price change is nearly meaningless. 

 

Well, truth be told, when you end-up being acquired, the acquirer should be considering all the cash the business is going to generate in the future. Not only the cash the business is generating at the moment of the acquisition. Therefore, changes in the portfolio of products and/or in the cost structure of the business, that will lead to higher cash flows in the future, could be reflected only in the purchasing price.

 

Gio, is there anything about this stock valuation wise that you find attractive?

 

I follow activist investors because in my experience poor performance is very often the fault of poor management. Even when the performance of a business is not so bad, poor management is often the cause why a good business is only doing so-so. In my everyday life I am exposed to lots of businesses and very often I find myself thinking “if only that business were better managed!”.

I have no doubt that lots of value can be created replacing the wrong management with the right one. I don’t have personally the financial wherewithal to do so, but some activist investors out there do.

 

And since I follow activist investors, I have come to realize the biggest threat is a company that decides to fight them. That is when lots of time can be wasted without the ability to implement any meaningful change.

 

Coming to your question about valuation:

If you value BAX on a TTM EPS adjusted for the recent spin-off, it seems to be trading at a very high multiple (27x). Yet, please consider:

1) BAX after the spin-off is a much more focused business. The market does not seem to have realized that, since after the spin-off BAX has basically gone sideways.

2) Net margins seem to be very low if compared to the rest of the industry. Therefore, there is much room for expansion.

3) BAX is not fighting Loeb: in fact Loeb has already gotten two seats on the board and has replaced the old CEO with the one he has chosen.

Given 1), 2), and 3) I think TTM EPS have very little meaning. The value of BAX depends very much on how good a job Mr. Almeida will be able to do.

 

This being said, there is obviously no need to rush in here. I have just opened a small position to get involved and to keep following the story as it evolves.

 

PS

Even on a TTM basis, which as I have said has very little meaning, BAX seems to be trading at a discount if compared to Medtronic and Boston Scientific. While, if Mr. Almeida is successful, I see much more upside for BAX than Medtronic and Boston Scientific. Another one, Becton Dickinson, is selling for 3.2x Sales, while BAX is selling for 2.1x Sales. Also BAX still holds 19.5% of Baxalta, which is a $23 billion market cap company. BAX ownership of Baxalta could be valued at: $23 x 0.195 = $4.5 billion. If you take those billions away from BAX market cap, the market is assigning a valuation of $20.5 - $4.5 = $16 billion to BAX’s business. It is selling then for just 1.63x Sales.

 

Loeb usually talks up his book so I don't take his opinion of quality seriously.

 

Well, to buy 10% of BAX Loeb must have invested almost $2 billion. What’s Third Point AUM? $20 billion? I don’t think it is much larger. Therefore, Loeb has put almost 10% of his fund in this idea. He might be talking his book, but surely (at least with this idea) he seems to be also putting his money where his mouth is! ;)

 

Cheers,

 

Gio

 

[Haasje]

I actually agree with Gio that this may not be a terrible spot to ride Loeb's coattails. I speculated a bit about his angle:

 

tax inversion angle possible

almeida is a dealmaker

room to expand margins

multiple is low relative to industry

 

more complete write up:

http://www.gurufocus.com/news/373012

[Spekulatius]

I actually agree with Gio that this may not be a terrible spot to ride Loeb's coattails. I speculated a bit about his angle:

 

tax inversion angle possible

almeida is a dealmaker

room to expand margins

multiple is low relative to industry

 

more complete write up:

http://www.gurufocus.com/news/373012

 

13x cash flow is expensive. COV (where the current CEO comes from) could be bought for 8x cash flow for extended time period and I see this s a similar case (commodities business somewhat in need to cost cutting and more innovation). I think a restructuring will take quite some time (as it did with COV) and also requires investing much more in R&D (similar to what occurred at COV). I think a value conscious investor will need to much lower entry point to get a margin of safety.

[giofranchi]

13x cash flow is expensive. COV (where the current CEO comes from) could be bought for 8x cash flow for extended time period and I see this s a similar case (commodities business somewhat in need to cost cutting and more innovation). I think a restructuring will take quite some time (as it did with COV) and also requires investing much more in R&D (similar to what occurred at COV). I think a value conscious investor will need to much lower entry point to get a margin of safety.

 

As I have said, BAX's low net margins, if compared to other peers, make me think this company has lots of room for improvement in profitability. Furthermore, its low P/S multiple makes me think I am not overpaying, if Mr. Almeida actually succeeds in achieving a profitability that is in line with BAX's peers. Therefore, I don’t think a valuation based on earnings nor cash flow might yield meaningful information here.

This being said, I agree the transformation of this company will take time, and there is no real reason to rush in buying its shares.

 

Cheers,

 

Gio

 

[ccplz]

Apparently gio's strategy is to rip ideas off of prominent activist investors.

 

[giofranchi]

Apparently gio's strategy is to rip ideas off of prominent activist investors.

 

Well, I think that in many cases they strive hard to introduce discipline in the companies they target. And business is giving to customers a product or a service that conveys the best value for the least dollars. To borrow from Malone: it is not rocket science, it is discipline.

Therefore, yes: if I understand their rationale, I am willing to follow them. It could be financially very rewarding.

 

Cheers,

 

Gio

 

[Patmo]

Something wrong with that?

[Haasje]

I don't think its a bad strategy to join activists(obviously it helps if you can be selective in a smart way). You can even help by actively voting with them. The holding periods of activists are probably way longer than the avg holding periods of private investors.

[ccplz]

Apparently gio's strategy is to rip ideas off of prominent activist investors.

 

Well, I think that in many cases they strive hard to introduce discipline in the companies they target. And business is giving to customers a product or a service that conveys the best value for the least dollars. To borrow from Malone: it is not rocket science, it is discipline.

Therefore, yes: if I understand their rationale, I am willing to follow them. It could be financially very rewarding.

 

Lol ok.

 

Seems like you are very good at 'borrowing'.

 

Well I hope you 'understand' this situation better than how you 'understood' Valeant.

 

What a joke.

[AzCactus]

Apparently gio's strategy is to rip ideas off of prominent activist investors.

 

Well, I think that in many cases they strive hard to introduce discipline in the companies they target. And business is giving to customers a product or a service that conveys the best value for the least dollars. To borrow from Malone: it is not rocket science, it is discipline.

Therefore, yes: if I understand their rationale, I am willing to follow them. It could be financially very rewarding.

 

Lol ok.

 

Seems like you are very good at 'borrowing'.

 

Well I hope you 'understand' this situation better than how you 'understood' Valeant.

 

What a joke.

 

I don't really care either way but this seems like an unnecessary attack.  It's not your money so why do you even care?

[Spekulatius]

I remain steadfastly that coat tailing does not work, if you don't know what you are buying. Believe me, I have tried.

[Haasje]

No argument there Spekulatus!

[LC]

Apparently gio's strategy is to rip ideas off of prominent activist investors.

 

Well, I think that in many cases they strive hard to introduce discipline in the companies they target. And business is giving to customers a product or a service that conveys the best value for the least dollars. To borrow from Malone: it is not rocket science, it is discipline.

Therefore, yes: if I understand their rationale, I am willing to follow them. It could be financially very rewarding.

 

Lol ok.

 

Seems like you are very good at 'borrowing'.

 

Well I hope you 'understand' this situation better than how you 'understood' Valeant.

 

What a joke.

 

I had about five responses to this all typed up, but decided to delete them all.

 

But there's a saying about good men doing nothing, so I'm posting just to echo Dshachory's comment above.

[giofranchi]

I remain steadfastly that coat tailing does not work, if you don't know what you are buying. Believe me, I have tried.

 

Spekulatius,

I have started this thread asking:

 

Another good idea by Mr. Loeb?

 

I am lucky enough to have some businesses which generate cash while needing very little capital expenditures. On the other hand, those businesses could never achieve a large scale, no matter how much money I invest in them. Therefore, I try to buy other businesses that I like at attractive prices. I still cannot buy whole businesses, and the stock market is right now my only feasible choice. I generally find this board to be a good place for exchanging stock market ideas.

 

Now, tell me: if it’s an idea of mine, or if it’s an idea of yours, or if it’s an idea of Loeb’s… what’s the difference?

As I have said, we are here to discuss ideas, regardless where they are coming from (at least, I am sure that’s the reason why I am here!).

 

I have said an activist investor like Loeb, especially if he has already succeeded in getting on the board and putting a new CEO at the wheel, might be very helpful in introducing a discipline that was lacking… You might disagree with my idea…

 

You have said that on a cash flow basis BAX looks expensive… I might disagree that cash flow is a good metric to value BAX right now…

 

Anyway, you see? We are not simply “coat tailing”: instead, we are thinking about an investment idea, and trying to communicate our thoughts and conclusions with other likeminded people.

 

As long as this process is done with politeness and respect for all, I am positive it will be fruitful.

 

Cheers,

 

Gio

 

[writser]

Now, tell me: if it’s an idea of mine, or if it’s an idea of yours, or if it’s an idea of Loeb’s… what’s the difference?

 

Well, for one thing Daniel Loeb is running an 11-digit portfolio so he doesn't even look at ~99.5% of all the stocks you and I can invest in. If he was as rich as you and me I am pretty sure he would invest in other names.

[giofranchi]

Well, for one thing Daniel Loeb is running an 11-digit portfolio so he doesn't even look at ~99.5% of all the stocks you and I can invest in. If he was as rich as you and me I am pretty sure he would invest in other names.

 

Well, you might be right. And that’s why I always ask which are supposed to be those much better investment ideas.

Could you name some ideas you like very much right now? I will be glad to check them out. And if they convince me, I will be glad to dump an idea of Loeb’s and embrace an idea of writser’s!

 

Cheers,

 

Gio

 

[writser]

The whole 'you don't post any idea'-routine is getting tiresome. True, I like to criticise your ideas but occasionally I also try to post something constructive. For example, back in August I tried to talk you (specifically you) out of VRX (down 59% since) and into Beximco (up 25% since). I still like that idea. The Beximco GDR trades at a ~65% discount to the main listing and is one of my largest positions. Last week I posted an arbitrage opportunity. It's not as attractive anymore, I took some profit off the table but might still be interesting. Then again, nobody bothered to reply so maybe my idea was just horrible and I was lucky :) . Couple of other ideas I have positions in:

 

Pardee resources: stock is roughly trading at the appraised value of its timber land and solar assets, you get the coal and oil royalty businesses for free.

Argo group: market cap ~$9m, have ~$20m in cash and will probably return capital to shareholders in 2016.

Retail holdings: trades at $16, holds stuff worth $30, pays a healthy dividend and is busy monetizing its holdings.

Burelle: a quality French auto industry supplier at a 50% discount.

PD-RX pharmaceuticals: trades at 3x P/E ex-cash, ROIC is ~29% over the past six years.

Japanese net-nets: I own Okayama Paper, Isamu Paint, Fujimak, Murakami, Car Mate, Nansin and Uehara.

Utstarcom: Small position, bit speculative. The largest shareholder filed a 13D in which they announced an agreement to sell their stake to a strategic investor at a 145% premium to the current price.

Conduril: construction company. Used to be my largest holding. Stock already tripled in 3 years but still trades at a 4x P/E multiple over the past 5 years earnings. Management holds a large stake. Company does a lot of business in Angola so the recent oil price collapse probably causes some problems in the short run.

 

But I guess the best advice I have for you is something completely different. Despite your prolific posting your picks have underperfomed the S&P by a wide margin for longer than you have been a forum member and I predict that that will be the case during the next 5 years as well given your erratic trading behavior (I'm willing to make a bet on that). On the other hand, your seem to be a great entrepreneur yourself. Have you ever considered putting your money in an index fund and spending all the time saved on growing your own businesses and dating beautiful girls?

 

My apologies for derailing this thread.

[giofranchi]

The whole 'you don't post any idea'-routine is getting tiresome. True, I like to criticise your ideas but occasionally I also try to post something constructive. For example, back in August I tried to talk you (specifically you) out of VRX (down 59% since) and into Beximco (up 25% since). I still like that idea. The Beximco GDR trades at a ~65% discount to the main listing and is one of my largest positions. Last week I posted an arbitrage opportunity. It's not as attractive anymore, I took some profit off the table but might still be interesting. Then again, nobody bothered to reply so maybe my idea was just horrible and I was lucky :) . Couple of other ideas I have positions in:

 

Pardee resources: stock is roughly trading at the appraised value of its timber land and solar assets, you get the coal and oil royalty businesses for free.

Argo group: market cap ~$9m, have ~$20m in cash and will probably return capital to shareholders in 2016.

Retail holdings: trades at $16, holds stuff worth $30, pays a healthy dividend and is busy monetizing its holdings.

Burelle: a quality French auto industry supplier at a 50% discount.

PD-RX pharmaceuticals: trades at 3x P/E ex-cash, ROIC is ~29% over the past six years.

Japanese net-nets: I own Okayama Paper, Isamu Paint, Fujimak, Murakami, Car Mate, Nansin and Uehara.

Utstarcom: Small position, bit speculative. The largest shareholder filed a 13D in which they announced an agreement to sell their stake to a strategic investor at a 145% premium to the current price.

Conduril: construction company. Used to be my largest holding. Stock already tripled in 3 years but still trades at a 4x P/E multiple over the past 5 years earnings. Management holds a large stake. Company does a lot of business in Angola so the recent oil price collapse probably causes some problems in the short run.

 

Of course, I cannot read everything that is posted, therefore if you had been constructive before, I have simply missed it. Now I’ll take a look at your ideas with great interest. ;)

 

But I guess the best advice I have for you is something completely different. Despite your prolific posting your picks have underperfomed the S&P by a wide margin for longer than you have been a forum member and I predict that that will be the case during the next 5 years as well given your erratic trading behavior (I'm willing to make a bet on that). On the other hand, your seem to be a great entrepreneur yourself. Have you ever considered putting your money in an index fund and spending all the time saved on growing your own businesses and dating beautiful girls?

 

I have already answered, but I’ll do it again. I am willing to bet alongside with you: during the next 5 years I am going to do worse that the S&P500…

Nonetheless, I like to look at businesses, studying them, and trying to think about which work and which don’t. And I like to write down my ideas and to share them with other people. This is the reason I joined the board in the first place.

I find this process not only stimulating, but also useful:

1) I think it helps me very much with the strategic choices I take every day for the businesses I own;

2) I think it might turn out to be very helpful when I’ll finally have the chance to buy a whole business.

I have really nothing against generating lots of cash and putting that cash in an index fund, but I guess by so doing I would miss the useful effort of studying other businesses besides those I run on a daily basis.

 

Cheers,

 

Gio

 

[writser]

I appreciate your honesty. Great answer. Now we only have to find somebody to bet against.

 

Though frankly, if you expect to underperform the S&P why not put the majority of your assets in an index fund and play around with the rest?

[AzCactus]

Writser,

 

Some of those ideas you posted seem very interesting.  Do you have a screen you use or how did you come across them?