Baxter: Why Investors Should Take Advantage Of The Low Valuation

Core Viewpoint - The healthcare sector remains attractive for growth and income due to inelastic demand for products and services, with Baxter International becoming a more appealing investment following a significant decline in stock valuation [2][5]. Company Background and Recent Earnings Results - Baxter International develops and sells a variety of healthcare products, including medical devices and connected care service devices, utilized in various care facilities [6]. - For Q1 2024, Baxter reported revenue of $3.6 billion, a decrease of 1.6% year-over-year, but slightly above analyst expectations. Adjusted earnings-per-share increased to $0.65 from $0.59 in the prior year, exceeding expectations by $0.02 [6][10]. - All segments showed growth except for Healthcare Systems & Technologies, which faced order delays and tough comparisons [7][8]. Segment Performance - Medical Products & Therapies revenue grew by 6% to $1.229 billion, while Healthcare Systems & Technologies revenue fell by 9% to $667 million. Kidney Care revenue increased by 3% to $1.102 billion [9]. - Despite challenges, the adjusted operating margin expanded by 180 basis points to 14.3% due to strong performance in Kidney Care and Medical Products & Therapies [9][11]. Future Guidance and Earnings Outlook - Baxter raised its full-year adjusted earnings-per-share guidance to a range of $2.88 to $2.98, up from a previous range of $2.85 to $2.95, with revenue growth projected at 2% to 3% in constant currency [10][14]. - Analysts expect double-digit earnings growth for 2024, with a compound annual growth rate of 8.2% since the spinoff of its biotech business in 2015 [14][15]. Dividend and Valuation Analysis - Baxter has a strong history of returning capital to investors, with a current annual dividend payment of $1.16 and a payout ratio of 40%, which is higher than the average since 2019 but still reasonable [16]. - The stock currently yields 3.4%, significantly above its five-year average of 1.8%, attributed to a decrease in share price. Baxter trades at a forward price-to-earnings ratio of 11.6, well below its historical average of 20 [16][19]. - The potential sale of its Kidney Care business, which has low margins, could improve overall profitability and support the dividend [16][19]. Final Thoughts - Baxter's stock has underperformed over the past year, leading to a valuation that is nearly half of its historical trading levels. The planned divestiture of its lowest margin business is expected to enhance focus on more profitable segments [19]. - With earnings estimates indicating sustainable double-digit growth, there is potential for multiple expansion, making Baxter an attractive value play in the medtech sector [19].