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We remain Neutral on Baxter International (BAX - Analyst Report). The company reported fourth quarter adjusted (excluding one-time items) earnings per share of $1.17 thereby beating the corresponding Zacks Consensus Estimate of $1.16 and surpassing the year-ago earnings of $1.11. The fourth quarter results were in line with Baxter’s earlier earnings guidance of $1.15 to $1.18.

Reported net income for the fourth quarter increased roughly 9.5% year over year to $463 million (or 82 cents per share). The company’s results in the reported quarter include special charges (after tax) of about $200 million (or 35 cents per share).

Total revenues were $3,594 million in the fourth quarter, up 3% year over year, beating the Zacks Consensus Estimate of $3,578 million. Domestic revenues for the quarter increased 2% to $1,466 million while overseas sales were higher 3% (up 3% in constant currency) to $2,128 million.

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 the other positives, 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 (SYNO), 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.  

We are concerned about the company’s conservative earnings guidance for 2012 which incorporates acquisition related dilution and foreign exchange headwinds. Also, despite resilience in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about slowdown in sales growth, 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. Among others, the company competes with Becton, Dickinson and Company (BDX - Analyst Report) in certain niches. We currently have a Neutral long-term rating on Baxter. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.

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