BAX Baxter International Inc

We reiterate our Neutral rating on Baxter International (BAX). Its earnings per share of $1.01 beat the Zacks Consensus Estimate of 99 cents and sailed past the year-ago earnings of 98 cents per share. The first quarter results beat Baxter’s earlier earnings guidance of 98 cents to $1.00 per share.

Sales for the quarter were $3,388 million, up 3% year over year, surpassing the Zacks Consensus Estimate of $3,302 million. On a segment-wise basis, Bioscience sales were $1,462 million, up 4% (up 5% in constant currency) year over year. Revenues from Medical Products were up 3% year over year (up 3% in constant currency), to $1,926 million.

For the second quarter of fiscal 2012, the company expects growth in revenues in the range of 3% to 4% in constant currency and adjusted earnings per share in the band of $1.10 and $1.12.  For the full year 2012, Baxter continues to forecast constant currency sales growth of about 4% to 5% and adjusted earnings per share in the range of $4.49 to $4.57 (earlier $4.47 to $4.57).

The news regarding Baxter still remains mixed. On the positive side, Baxter’s focus on life-sustaining products, which are not commoditized, partly insulates it from an economic downturn. The company is able to generate recurring revenues, and consistent cash flow, due to its focus on chronic diseases. Among other positive factors, Baxter retains a strong product pipeline with several products in late-stage clinical development.

Baxter, in November 2011, completed its acquisition of Baxa Corporation. The takeover highlights the company’s continued commitment toward patient safety and nutrition. It also permits Baxter to provide a wider set of solutions for the safe preparation and delivery of IV medication. Baxa’s know-how will benefit patients across the globe.

Moreover, Baxter struck a deal, in December 2011, to buy Synovis Life Technologies, a well-known provider of mechanical and biological products for the repair of soft tissue utilized in a large number of surgical operations. The acquisition will further expand Baxter’s offerings in the area of biosurgery and regenerative treatment.

On the flip side, despite resilience in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about slow growth in sales, a slightly somber outlook for hospital spending and tightening of reimbursement. We also account for the unfavorable impact of foreign exchange translation and possible dilution associated with the company’s acquisitions of Baxa and Synovis.

Improved execution has lifted sentiment somewhat toward Baxter. It is a good bet for value investors willing to wait as fundamentals improve further. The lingering bearishness surrounding the stock can be lifted by consistent execution. In the meantime, the company continues to deploy robust cash flow for stock repurchase and dividend. Among others, the company competes with Becton, Dickinson and Company (BDX) in certain niches. We currently have a Neutral long-term rating on Baxter. The stock presently retains a Zacks #3 Rank, which translates into a short-term “Hold” recommendation.

 
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