Earnings Preview: Baxter

Baxter International (BAX) is slated to report fourth quarter and fiscal 2010 results on Thursday, January 27. The company expects earnings per share in a range of $1.09 and $1.11 for the fourth quarter and in a band of $3.96 to $3.98, before any special items, for fiscal 2010. The current Zacks Consensus Estimates for the fourth quarter and fiscal year are $1.10 and $3.97 per share, representing an estimated 6.73% and 4.78% annualized growth, respectively.

Third-Quarter Recap

Baxter reported third quarter fiscal 2010 earnings per share of $1.01, beating the Zacks Consensus Estimate of 97 cents and surpassing the year-ago quarter’s earnings of 98 cents.

Net sales for the quarter increased 3% year over year to $3.2 billion, mostly in line with the Zacks Consensus Estimate. Domestic revenues were $1.4 billion, up 4%, while overseas sales moved up 1% (up 4% in constant currency) to $1.8 billion.

On a segment basis, BioScience revenues decreased 4% year over year to $1.4 billion. Medication Delivery sales upped 5% year over year to $1.2 billion. Renal sales grew 3% year over year to $594 million.

Estimate Revision Trend

Agreement

The overall trend in estimate revisions for Baxter is marked by a relative lack of activity. Out of the 15 analysts covering the stock, only 1 analyst raised his/her earnings estimate for the fourth quarter in the last 30 days (none in the last 7 days). There was one negative revision in both the last 7 and 30 day time frames.

With regard to earnings revisions for fiscal 2010, there were no upward revisions among the 18 analysts while there were two instances of downswings in both the past week and month.

Magnitude

For the concerned quarter, the magnitude of earnings revisions was static over the last 7 and 30 days. For fiscal 2010, there was again no movements over the past week as well as month.

Baxter had two positive earnings surprises of 4.12% and 1.09%, respectively, in the two sequentially preceding quarters. It matched estimates in the earlier two quarters. The company produced an average positive earnings surprise of 2.61% over the last four quarters, implying that it beat the Zacks Consensus Estimate by that measure.

Our Take

The news regarding Baxter 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.

Further, Baxter retains a strong product pipeline with several products in late-stage clinical development. Among other factors, the company has a large cash balance, strong operating cash flow and backup lines of credit providing ample liquidity.

On the flip side, despite recent improvement in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about stagnation in sales, a somber outlook for hospital spending and tightening of reimbursement.

The lingering bearishness surrounding the stock can be lifted by consistent execution. Baxter is a good bet for value investors willing to wait as fundamentals improve. It competes with Becton, Dickinson and Company (BDX) and Talecris Biotherapeutics Holdings Corp. (TLCR) among others. 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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