Earnings Preview: Baxter (BAX)

Baxter International (BAX) is slated to report second-quarter 2010 results on Thursday, July 22, 2010. The current Zacks Consensus Estimate for the second quarter is 92 cents a share, representing a 3.9% annualized deceleration.

For the second quarter, Baxter’s sales growth, excluding the impact of foreign currency, is expected to range from 0% to 2%. Further, based on prevailing foreign exchange rates, Baxter expects sales growth in the range of 3% to 5%.

First-Quarter Flashback

Baxter reported first-quarter fiscal 2010 earnings per share of 93 cents, in line with the Zacks Consensus Estimate and higher than the year-ago figure of 83 cents.

Net sales in the first quarter increased 11% year over year to $3.1 billion. Excluding the favorable foreign currency translation, net sales increased 5% year over year. Baxter registered sales growth in all business segments.

BioScience revenues increased 9% year over year to $1.4 billion. Medication Delivery sales increased 14% year over year to $1.2 billion. Renal sales increased 13% year over year to $584 million.

On a geographic basis, domestic sales accounted for 42% of total sales and increased 4% year over year. International sales increased 17% year over year.

Estimate Revision Trend

Agreement: The overall trend in estimate revisions for Baxter is marked by a relative lack of activity. Out of the 14 analysts covering the stock, only 1 analyst raised the earnings estimate for the second quarter in the last 30 days. There was no downward activity during the previous 7 or 30 days.

With regard to earnings revisions for 2010, 1 analyst out of 17 raised the estimate over the last 7 and 30 days while 1 analyst lowered the estimate during the same timeframes. The current Zacks Consensus Estimate for 2010 is $3.92 a share, reflecting roughly 3.5% year-over-year growth.

Magnitude: There were no earnings revisions over the last 7, 30 and 60 days, for the current quarter. However, there was a decrease of 14 cents over the past three months.

Estimates for Baxter remained static, over the last week and month, for 2010.  Estimates declined by a penny over the last 60 days.  There was a decrease of 32 cents over the preceding 90 days.

Baxter matched estimates in the previous two quarters thereby not providing any earnings surprises. It had positive earnings surprises in the two still-earlier quarters. The company produced an average positive earnings surprise of 2.11% over the last four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take: We believe that the recent resolution, with the FDA, of recall of infusion pumps removes a significant overhang on the stock. However, we continue to be concerned that the company lowered its sales, earnings per share and cash flow outlook for fiscal 2010. Earnings per share are now expected to be in the range of $3.92 to $4.00 for 2010 versus the prior guidance of $4.20 to $4.28. The downward revision was partly due to a negative impact from health care reform.

Also, on the negative side, the plasma proteins market is growing more slowly than previously estimated by the company. Baxter experienced a loss of market share and still faces pricing pressure.

Among buy-side factors, Baxter’s focus on life-sustaining or chronic care products ensures a recurring revenue stream. Its products are not commodity-like in nature, which insulates it from an economic downturn. The product pipeline is robust with several products in late stage clinical development. Our Neutral recommendation on Baxter is supported by a Zacks #3 Rank (Hold).

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