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Hedge funds with over $100 million in U.S. equity exposure revealed their holdings last week. Of note, one activist investor is getting some support for his top holding – a health care play in the medical devices industry.
Baxter International (NYSE: BAX) is a big bet by billionaire Dan Loeb’s Third Point activist hedge fund.
Baxter is a maker of hospital supplies and surgical tools. It spun off its bio-pharmaceutical unit last year as Baxalta (NASDAQ: BXLT).
Third Point has Baxter as its largest holding. It owns close to 10% of the company. Third Point is also Baxter’s largest shareholder.
But Third Point could be getting some support. Another activist hedge fund, Starboard Value, is taking an interest in Baxter. It doubled its stake in the company last quarter and now owns 2.4 million shares, or roughly 0.4% of the company.
Then there’s yet another activist hedge fund, Jana Partners, which cut its stake in half last quarter. But Jana still owns 1% of the company.
Top Hedge Funds Push for Change
Third Point took an activist role at Baxter last year and successfully pushed for board representation. Now they also want a say in the new CEO. And in a unique spin, Dan Loeb is taking a constructive approach. Known for his pointed letters and sharp tongue, Loeb has had mostly nice things to say about Baxter.
The fund thinks that Baxter is undervalued and is a strong business, but needs to pivot toward greater growth opportunities. Third Point also believes there’s the need for Baxter to get its margins more in line with peers. In the meantime, the company is paying a 1.2% dividend yield.
In terms of margins, Baxter is generating an operating margin of 8%, while peers like Becton, Dickinson & Co. (NYSE: BDX) is generating a10% operating margin, CR Bard (NYSE: BCR) is at 17.5% and Waters Corp. (NYSE: WAT) is at 28%.
There’s also the potential for Baxter to see upside from its spinoff, Baxalta. Shire PLC (NASDAQ: SHPG) is said to be interested in buying the Baxter spinoff for $30 billion. And Baxter still owns a 19.5% in Baxalta – meaning a windfall for the company that could be used for buybacks or debt reduction.
Things Are Getting Interesting
Third Point has gotten a Baxter board seat, adding one of the hedge fund’s partners, Munib Islam, to the board.
And thanks to Third Point’s prodding, Baxter added a new board member late last year – a move that helps make the company even more appealing. The health care company added Boston Scientific (NYSE: BSX) CEO Mike Mahoney to its board.
The beauty of the move is that Mahoney helped Boston grow into a medical devices powerhouse. Boston shares are up 190% – nearly triple the S&P 500 – since Mahoney took over at Boston. The idea is that Mahoney can bring some of that magic to Baxter.
As mentioned, Baxter is also looking for a new chief executive. Having Mahoney on the board adds some expertise and should help with recruiting a top CEO.
Baxter has been one of the best-performing medical device companies, although the entire industry has been underperforming the broader market.
Nonetheless, Baxter has some key opportunities to grow its business, which includes boosting operating margins and getting into faster-growing markets. It also has a solid balance sheet and double-digit return on equity. And don’t forget about that 1.2% dividend yield.
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