Baxter International Inc. (NYSE:BAX) shares are up more than 45.40% this year and recently decreased -0.15% or -$0.1 to settle at $64.47. Becton, Dickinson and Company (NYSE:BDX), on the other hand, is up 26.05% year to date as of 10/31/2017. It currently trades at $208.67 and has returned -1.09% during the past week.
Baxter International Inc. (NYSE:BAX) and Becton, Dickinson and Company (NYSE:BDX) are the two most active stocks in the Medical Instruments & Supplies industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect BAX to grow earnings at a 13.55% annual rate over the next 5 years. Comparatively, BDX is expected to grow at a 10.83% annual rate. All else equal, BAX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 18.05% for Becton, Dickinson and Company (BDX). BAX’s ROI is 45.00% while BDX has a ROI of 6.60%. The interpretation is that BAX’s business generates a higher return on investment than BDX’s.
Cash is king when it comes to investing. On a percent-of-sales basis, BAX’s free cash flow was 0% while BDX converted 0.2% of its revenues into cash flow. This means that, for a given level of sales, BDX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. BAX has a current ratio of 3.00 compared to 5.60 for BDX. This means that BDX can more easily cover its most immediate liabilities over the next twelve months. BAX’s debt-to-equity ratio is 0.38 versus a D/E of 1.51 for BDX. BDX is therefore the more solvent of the two companies, and has lower financial risk.
BAX trades at a forward P/E of 23.92, a P/B of 3.82, and a P/S of 3.33, compared to a forward P/E of 20.05, a P/B of 3.66, and a P/S of 3.90 for BDX. BAX is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. BAX is currently priced at a -4.19% to its one-year price target of 67.29. Comparatively, BDX is -5.44% relative to its price target of 220.67. This suggests that BDX is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for BAX and 1.90 for BDX, which implies that analysts are more bullish on the outlook for BAX.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. BAX has a beta of 0.70 and BDX’s beta is 1.05. BAX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. BAX has a short ratio of 2.31 compared to a short interest of 11.43 for BDX. This implies that the market is currently less bearish on the outlook for BAX.
Becton, Dickinson and Company (NYSE:BDX) beats Baxter International Inc. (NYSE:BAX) on a total of 7 of the 14 factors compared between the two stocks. BDX is growing fastly, has a higher cash conversion rate and higher liquidity. In terms of valuation, BDX is the cheaper of the two stocks on an earnings and book value, BDX is more undervalued relative to its price target. Finally, DXCM has better sentiment signals based on short interest.