Dear Mr. Berko:

Could you please tell me about Baxter International Inc. stock? My nephew recently joined the company in Deerfield, Ill., and he thinks I should buy the stock because it’s close to its all-time low price and earnings are at an all-time high. Please give me your opinion.

N.E., Joliet, Ill.

Dear N.E.:

Baxter International Inc. (BAX-$25.79) was founded in 1931 as a manufacturer of intravenous solutions. That’s the “stuff” in a clear plastic bag that hospitals hang on a portable appliance so its contents drip down a tube through a needle that is usually inserted into a forearm. In the early 1930s, BAX had six employees making a line of five solutions in clear glass containers (no disposable plastic bags in those days).

In 1939, BAX developed the first vacuum-type storage unit that allowed blood to be stored safely up to 21 days, rather than just a few hours. When World War II broke out, BAX’s solutions (now 25) were the only ones to meet armed forces specifications. Then, in the early 1950s, BAX’s engineers introduced the first commercial kidney dialysis machine and the company earned the right to etch its name in the annals of history.

Today, this greatly respected global medical products and services company generates $8.1 billion in revenues focusing on three critical areas of health care:

1. Medication delivery produces and delivers critical fluids and drugs to patients. These include basic IV solutions and higher-margin specialty pharmaceuticals, such as premixed drugs, anesthetic agents, critical care generics, nutrition and oncology products, antibiotics, pain medications and chemotherapy solutions. BAX’s medication delivery unit forms alliances with traditional pharmaceutical houses, such as Merck & Co. Inc., Eli Lilly and Co. and Pfizer Inc., to formulate and package their drugs for delivery.

The division produces 41 percent of the company’s revenues and 36 percent of its profits and should grow revenues by 6 percent annually.

2. BAX’s bioscience division makes plasma-based and recombinant clotting factors for hemophilia as well as bio-pharmaceuticals that treat immune deficiencies and related blood disorders plus a broad range of vaccines. Bioscience also produces bio-surgery products and blood processing and storage systems.

The excitement surrounding bioscience today is something called Factor VIII for hemophilia, the properties of which are significantly superior to currently produced recombinant DNA material. BAX believes that this new drug will generate about $1.2 billion in additional revenues.

BAX’s bioscience Division produces 38 percent of revenues and 41 percent of profits, and sales are likely to increase about 15 percent annually.

3. The renal division designs,   manufactures and provides dialysis equipment (not services) for people with kidney failure. BAX is the world’s largest and most-esteemed producer of products for hemodialysis, peritoneal dialysis equipment, solutions, container systems, automated cyclers and instrumentation.

The renal division provided BAX with 23 percent of its revenues and 23 percent of profits, and those revenues are expected to grow about 8 percent annually.

BAX shares haven’t traded this low since 1997, when the stock moved in a narrow price range between $30 and $20 a share. At that time, BAX revenues were $6.1 billion, earnings were $1.16 a share and the stock traded at an average price-earnings ratio of 22. Earnings have grown impressively since then. With per-share earnings of $1.75 in 2001, BAX traded in the mid-$50s, with an average price-earning ratio of 25. In 2002, BAX’s earnings rose to $1.92 and the share price reached $60 while the average price-earnings ratio that year was about 25. This year, earnings are expected to come in at $2.25, and at the current price of $25.79, BAX trades at a very attractive and very low 11.5 times earnings. I believe BAX’s earnings progress, its nonpareil reputation, its superb research and development, its worldwide leadership position and its extremely low price-earnings ratio, which has averaged 22 over the last seven years, are very compelling reasons to own this stock.

There are 18 suits on Wall Street who follow BAX, and only two have given the stock a “buy” rating. However, Value Line’s Keith Markey reckons that earnings will reach $3.75 per share in the coming five years and that the shares could trade in the mid-$60s. I believe this is another compelling reason to own BAX.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or visit his Web site at www.berkoradio.com.