Earnings Preview: Baxter

Baxter International (BAX - Analyst Report) is slated to report third-quarter 2012 results on Thursday, October 18. The current Zacks Consensus Estimate for the quarter is $1.14, representing an estimated 4.2% annualized increase.

Second Quarter Recap

Baxter reported second quarter adjusted (excluding one-time items other than stock based compensation expense) earnings per share of $1.12, beating the Zacks Consensus Estimate of $1.11, and surpassing the year-ago earnings of $1.07. Reported net income increased to $661 million (or $1.19 per share), up about 7% year over year.

Revenues were $3,572 million, up 1% year over year, beating the Zacks Consensus Estimate of $3,538 million. U.S. revenues for the quarter moved up 6% to $1,503 million while ex-U.S. sales dropped 2% (up 3% in constant currency) to $2,069 million.

The Plasma Proteins business, where Baxter had encountered structural problems in the past, did better in the reported quarter with revenues of $364 million, flat (up 4% in constant currency) year-over-year.

Estimate Revision Trend

Agreement

Of the 17 analysts covering the stock, only one changed his/her estimate (in the upward direction), for the current quarter, over the past month. There were no changes in the prior week.

For 2012, out of 19 analysts, only one analyst changed his/her estimate (in the upward direction) over the past month. There were no revisions over the past week. The current Zacks Consensus Estimate for 2012 is $4.53, reflecting an estimated 5.2% year over year increase.

Magnitude

The magnitude of revisions, for the forthcoming quarter, has hit a plateau over the last week and month. The estimate for 2012 has also not moved over the prior week and month.

Baxter has produced positive surprises in three of the previous four quarters and we expect a similar trend may continue. The company produced an average earnings surprise of 1.28% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

The news regarding Baxter still remains somewhat 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.

During the third quarter, Baxter announced a quarterly dividend of 45 cents per share. The new dividend constitutes a yearly dividend of $1.80 per share, up over 34% from the prior annual dividend of $1.34. Baxter also announced a fresh share buyback authorization of up to $2 billion of its common stock.

Baxter enjoys robust cash flow and it has returned notable funds to shareholders by way of share repurchases and dividends. The company has generated average annual cash flow of $2.7 billion in the past five years. It has returned over $11.4 billion in aggregate to its stockholders by way of share repurchases and dividends.

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.

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 relative stagnation 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. Among others, the company competes with Becton, Dickinson and Company (BDX - Analyst Report) in certain niches. We currently have a Neutral long-term recommendation on Baxter. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.