Zacks_Analysts' Blog : Earnings Scorecard: Baxter - Analyst Blog

Baxter’s (BAX) fourth-quarter 2011 results have evoked negative sentiment among analysts. The bearish reaction appears to reflect the company’s conservative earnings guidance for 2012 which incorporates acquisition related dilution and foreign exchange headwinds. 

Highlights from the Quarter

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 Plasma Proteins business did not do so well with sales of $397 million, down 4% (down 2% in constant currency) year over year. Antibody Therapy provided better results with revenues of $406 million, higher 5% (up 6% in constant currency) year over year.

We have discussed the quarterly results at length here: Baxter Beats Estimates

Agreement – Estimate Revisions

Estimate for fiscal 2012 is totally weighted on the negative side since the release of the fourth quarter results. Out of a total of 17 analysts covering the stock, none changed their estimates over the past week while 15 have lowered their estimates over the last month with no upward revisions.

The negative trend is also observed for fiscal 2013 with 11 downward revisions (out of 14 analysts) in the past month with no reverse movements. However, there were no changes in the estimates over the past week.

Magnitude – Consensus Estimate Trend

Negative revisions, coupled with sheer directional agreement, have led to a drop in annual forecasts for Baxter. There has been a drop of 11 pennies in the consensus, for the current fiscal year, over the prior month. Estimates for 2013 have dropped by 15 cents over the prior month. The current Zacks Consensus Estimate for fiscal 2012 is $4.54, reflecting an estimated 5.39% year-over-year growth.  

Baxter Stays at Neutral

For the first quarter of fiscal 2012, the company expects growth in revenues of 2% in constant currency and adjusted earnings per share in the range of 98 cents to $1.00.  For the full year, Baxter forecasts constant currency sales growth of 4% to 5% and adjusted earnings per share in the range of $4.47 to $4.57.

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 other positive factors, 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, which is expected to close in first-quarter fiscal 2012, 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 stagnation in sales, a slightly somber outlook for some 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) 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.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/.