EUR 850.00 For Business Accounts Only

Morningstar | Affirming Our Narrow-Moat Ratings for Baxter and Fresenius SE; Raising Fair Value Estimates

After taking a fresh look at dialysis and injectable therapy-focused Baxter and Fresenius SE, we are maintaining our narrow moat and stable trend ratings for both firms. We are also raising our fair value estimates, as we account for cash flows generated since previous updates and adjustments to underlying projections. For Baxter, we are raising our fair value estimate to $69 per share, or about 21 times our updated 2019 earnings, from $63 per share previously. For Fresenius, we are increasing our fair value estimate for its local shares to EUR 60 per share, or 18 times our updated 2019 earnings, up from EUR 59 per share previously.

We believe narrow moats surround both organizations. However, their moat sources differ due to the way these firms tackle their target markets. For example, Baxter's focus on medical technology, including at-home peritoneal dialysis products, infusion pumps, and other advanced delivery systems, keeps its primary moat sources in switching costs and intangible assets. While Fresenius SE benefits from some of those elements particularly in its injectable therapy (Kabi) segment, they are not prominent enough to offset its concentration in services, particularly in-clinic dialysis, that contributes primarily to cost advantages in our opinion.

From a valuation perspective, Fresenius' stock appears to be a better value than Baxter's stock. We currently see about 20% upside in Fresenius' stock, which appears a bit depressed on roughly flat bottom-line prospects in 2019 related to ongoing investments and challenges in its hospital operations. Baxter's stock looks slightly overvalued to us with the market possibly anticipating that it will continue to significantly outpace expectations in the long run, as it has done since the mid-2015 Baxalta split. While possible, we think its operational goals are ambitious, and if it merely meets those goals, its stock may revert toward our fair value estimate.