NEW YORK (TheStreet) – With year-to-date gains of only 6.7%, Baxter International (BAX - Get Report) hasn't stunned investors with exceptional gains. Not compared to, say, Allergan (AGN - Get Report) , whose shareholders are 50% wealthier in 2014. Baxter still trails the health care sector's 11% gain, according to Morningstar.
Still, at around $74 per share, and a price-to-earnings ratio four points under the industry average of 24, according to Yahoo! Finance, there's still room for Baxter to close that gap.
First, the company is growing revenue at a 16% rate. That's five points higher than the industry average. Still Wall Street applies a higher valuation to rival Becton, Dickinson and Company (BDX - Get Report) , which trades at a P/E of 24. This is even though Becton is growing at 5%.
Next, consider Grifols (GRFS) , which carries a P/E (52) that is more than twice that of Baxter. On a price-to-sales basis, Grifols enjoys of multiple of seven, more than twice the industry average P/E of three. Baxter, meanwhile, trading at a P/S of 2.44. This is even though both Baxter and Grifols are growing revenue at the same rate.
Relative to Baxter's peers, Wall Street doesn't believe Baxter can generate the growth to justify a higher stock price. One of the bearish arguments for Baxter is the fear that rival Biogen (BIIB - Get Report) , which has a strong hemophilia treatment, is well positioned to attack Baxter's market share.
Some pundits believe Baxter could lose as much os 50% of the market, a business that's generating more than $2 billion in annual revenue.
While Biogen's long-acting Factor VIII product Eloctate, comes highly regarded, it's still too early in the process to suggest any sort of pricing impacts on Baxter. Baxter's management are worried -- not to the extent of Wall Street analyst. Management believes that even when Eloctate fully enters the markets, Baxter can still retain at least 30% of the market.
Baxter has never been shy about doing deals or divesting assets wherever and whenever the company believes it can create more value.
The company recently announced plans to spin off its biopharmaceuticals business, which will become its own publicly traded company. The spun-off company, which will operate the hemophilia treatment, will be more inline with Grifols. This is a business that's pulling in roughly $6 billion annually.
Baxter is following the blueprint of recently successful splits like Abbott Labs (ABT - Get Report) , which spun off its drug business into AbbVie (ABV) . Since that split both Abbott and AbbVie stock have gained 36% and 60%, respectively.
From my vantage point, this spin off, which will place more of a focus on Baxter's remaining business, will unlock considerable value for shareholders. Not to mention, it minimizes Baxter's risk of potential share loss to Biogen.
This is because the spun-off entity, which will trade under its own brand, will do all of the heavy lifting. The remaining portions of Baxter will focus on growing the medical devices business, which are growing at mid single digits.
As it stands, Baxter stock, which is trading at just 13 times 2015 estimates of $5.37, according to Yahoo! Finance carries very little risk, yet can deliver significant reward.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BAXTER INTERNATIONAL INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate BAXTER INTERNATIONAL INC (BAX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income." You can view the full analysis from the report here: BAX Ratings Report