Is Baxter International an Underrated Healthcare Investment Play?

Baxter International (NYSE: BAX) was a dividend stock, but it's no longer one. That's because the dividend was just cut from $0.17 per share per quarter to a token penny. Dividend lovers will want to skip on this stock, but turnaround investors and those with a value bias may find it worthy of a deep dive.

What does Baxter International do?

Baxter makes medical products like surgical sealants and hospital beds. What it makes may not be sexy -- say, like Intuitive Surgical's da Vinci surgical robot -- but the healthcare industry needs what Baxter sells to operate. That's the long-term story that matters most. Indeed, the aging of the baby boomer generation is likely to lead to increased demand for healthcare. Which, in turn, means increased demand for Baxter's perhaps mundane products.

Image source: Getty Images.

That said, Baxter hasn't been performing particularly well of late. Revenue has been inconsistent, and earnings have dipped into the red. There's a reason why the dividend was cut. Investors have been worried, noting that the stock has fallen roughly 75% over the past five years. Conservative investors and dividend investors should probably watch Baxter from the sidelines. But what about turnaround investors and value investors?

Baxter has an opportunity

The necessity nature of Baxter's products suggests that it will muddle through this weak patch. It could be ugly for a bit, but the company's leverage isn't outlandishly high, and it is still covering its interest costs two times over despite the headwinds it is facing. There are clear risks, but the money freed up from the dividend cut should give management a lot of extra financial leeway to get the business back in growth mode.

Meanwhile, the stock's valuation appears attractive following such a massive price decline. The price-to-sales ratio and price-to-book value ratios are both well below their five-year averages. Losses make the price-to-earnings ratio unusable, but the forward P/E is also below its longer-term average. Overall, the stock does, indeed, look cheap.

Not for the faint of heart

Baxter appears attractively priced with turnaround appeal. That's the good news for contrarian types that think long term. If demographics are destiny, as the saying goes, this healthcare company's products will see increasing demand in the future. The bad news is that a business recovery could take a little while and be uneven, noting the recent dividend cut, which should dissuade income lovers from buying shares.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intuitive Surgical. The Motley Fool recommends the following options: long January 2028 $520 calls on Intuitive Surgical and short January 2028 $530 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.