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Healthy Values: Baxter and Pfizer

10/23/2014 7:00 am EST


John Buckingham

Editor, The Prudent Speculator

A long-term value investor, John Buckingham focuses on building a broadly diversified portfolio of quality stocks. Here, the editor of The Prudent Speculator highlights a pair of healthcare ideas.

Baxter International (BAX)

Baxter develops, manufactures, and markets products that focus on hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions.

While the firm's biopharma and medical products businesses will split in two in 2015, we believe that competitive advantages should remain strong, supported by the fact that more than two-thirds of Baxter's revenue is generated from market-leading products.

Emerging market economies are a prime source of future growth and hemophilia demographics point to a large unmet need in numerous regions.

We continue to see the benefits of the firm's Gambro AB acquisition, due to its strength in hemodialysis and renal replacement therapies.

BAX shares are trading at relatively attractive valuation metrics and offer investors a 2.9% dividend yield.

Pfizer (PFE)

Pfizer is a global pharma company focused on drugs for cardiovascular, metabolic, central nervous system, immunology, pain, infectious diseases, respiratory, oncology, and other indications.

Although the consumer products division-which includes non-prescription self-medications and animal health products-is a relatively small portion of company revenue, we like the diversification and cash flow the unit provides.

While PFE shares have essentially gone nowhere for the last 18 months, we continue to like the pharma entity, given its current valuation (trading at 13 times forward earnings projections), improving drug pipeline, and the potential for upside from capital allocation and business development.

Backed by a solid balance sheet and strong free cash flow generation, management has sufficient financial flexibility to invest in growth and return capital to shareholders. PFE shares currently offer investors an attractive 3.5% dividend yield.

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