Our options picks from last week are starting out on a strong note today. BlackBerry has crossed the $10 threshold this morning, NRG Energy and Diamondback Energy are trading up, ConAgra is bouncing and IBM is trading down in line with our contrarian trade.
We start this week with an exploration of the possibilities in the options of Baxter International Inc. (NYSE:BAX). Baxter International with its market capitalization of $40.09B is a global, diversified healthcare company. Baxter, through its subsidiaries, develops, manufactures and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. The company has two reporting segments; namely, Biopharmaceuticals and Medical Products.
Why I’m Excited about Baxter International Inc.
- Value in a Potential Spin-off
The stock chart above shows how shares of Baxter have traded in the last six months. You will notice a sharp upswing towards the end of March when the share price shot up from around $65 apiece to somewhere around $75 apiece. The upswing came at the heels of Baxter’s plan to spin-off its Biopharmaceuticals segment into a separate healthcare company. Baxter says it expects the potential spin-off and original company to become successful, profitable and sustainable independent companies.
News of the proposed spin-off is lifting shares of Baxter because the company has been profitable and both reporting segments are making significant contributions to top and bottom lines. In 2013, the Biopharmaceuticals segment provided 43% of sales on revenue of $5.8B and the Medical Products contributed 57% of sales on revenue of $9.4B.
The spin-off is expected to be completed by the middle of 2015 and Baxter intends it to take the form of tax-free distribution to Baxter shareholders. I posit that the potential spin-off will continue to drive the share price of Baxter higher because investors will continue to load on shares of the company for two reasons. The first reason is that buying shares of Baxter now will give them ownership in two highly profitable healthcare companies. The second reason is that their ownership of the new company will be tax-free.
- Interesting Valuation Metrics
Baxter is an interesting dividend-paying stock that investors would love to own. The company has a 5-year dividend growth rate of 16.4% and a payout ratio of 56.5%, which shows much upside potential on dividends. Baxter has P/E ratio of 20.06, which might look pricey; yet, the Forward P/E ratio of 14.35 shows that the company is reasonably valued. I am more impressed with the RSI index, which stands at 53.05 despite the volume of recent buying action that has sent the share price skyrocketing. I believe that the stock will climb much higher because an RSI under 60 suggests that the buying action is just starting out.
- Another Bullish Jump on the Horizon
Based on the foregoing about a potential spin-off and interesting valuations, shares of Baxter are set to rise in the next couple of months. However, I can see a catalyst for short-term surge in the share price when the company releases Q2 2014 earnings on July 17. The company gave optimistic guidance in which it expects a 13% to 14% growth in revenue and earnings between $1.06 and $1.09.
How to Trade BAX Options
I am long BAX and I believe that an earnings beat in the second quarter will easily send the share price above $76. Hence, I am looking at the BAX Nov 2014 75.000 call (BAX141122C00075000) at the current asking price of $2.21. If you join me on this trade, you should be ready to close shop once with whatever gains you have made by July 7.
— Daily Option Alerts