On Jan 28, we retained Baxter International ( BAX - Analyst Report ) at Neutral after the company met Zacks Consensus Estimates for earnings for the fourth quarter and for 2012.

Why the Retention?

Baxter’s fourth quarter revenues rose 5% in constant currency to $3,753 million and beat the Zacks Consensus Estimate of $3,714 million while earnings per share of $1.26 met the forecast. As in the previous quarter, the company’s in-line earnings failed to provide an earnings surprise.

Baxter’s outlook for 2013 was favorable. For 2013, Baxter guided to reported sales growth of 10% in constant currency. The company altered its expected adjusted earnings per share to the range of $4.60 to $4.70 (earlier $4.51 to $4.54) for 2013. Baxter expects cash flow from operations to approximate $3,300 million for 2013.

Despite the favorable earnings guidance, estimates for Baxter have been declining since it reported fourth quarter results on Jan 24. The Zacks Consensus Estimate for 2013 has gone down 3.5% to $4.67 per share. The Zacks Consensus Estimate for 2014 has dropped marginally 0.8% to $5.27.

The news regarding Baxter still remains somewhat mixed. On the positive side, Baxter’s focus on life-sustaining products which are not commoditized partly insulate 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.

The Gambro acquisition in December 2012 for about $4 billion, strengthens the company’s role in the hemodialysis market. It will be able to serve both acute and chronic dialysis patients. With the takeover, Baxter gains an established set of products which strengthen its existing dialysis lineup. Baxter is expected to benefit from the acquisition in several ways. It will be better placed to push sales in European markets, where Gambro had a strong presence. Baxter will also be in a stronger position to grow revenues in the rapidly expanding Asian and Latin American markets. Its pipeline has strengthened post acquisition. We are, however, wary of short-term earnings dilution on account of the Gambro acquisition.

On the flip side, despite resilience in certain sub-segments, we are concerned about relative stagnation in sales, a slightly somber outlook for hospital spending and tightening of reimbursement.

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.

Other Stocks to Consider

Baxter carries a Zacks Rank #4 (Sell) rating. NuVasive, Inc. ( NUVA - Snapshot Report ) and Haemonetics Corporation ( HAE - Analyst Report ) are two Zacks Rank #1 (Buy) stocks which are expected to do well.