This medical device company beat earnings estimates by $0.08 in its most recent quarter. As COVID eventually subsides, demand for its products should continue to grow.
Baxter International Inc. (BAX)
From Wall Street Stock Forecaster
Baxter International Inc. is a buy. The company (TSINetwork Rating: Average) makes a variety of medical devices, including intravenous pumps and kidney-dialysis equipment. The U.S. accounts for about 40% of its revenue.
Despite the COVID-19 disruptions, Baxter’s revenue gained 10.5%, from $10.56 billion in 2016 to $11.67 billion in 2020.
Starting in 2015, Baxter began a multi-year restructuring plan, which included consolidating facilities and focusing on high-margin products. The company expects the plan will cut $1.2 billion from its annual costs by the end of 2023.
Thanks to those savings, Baxter’s overall earnings (before unusual items) jumped 68.9%, from $1.08 billion in 2016 to $1.72 billion in 2019. Due to fewer shares outstanding, earnings per share over those four years rose at faster pace of 68.9%, from $1.96 to $3.31. However, COVID-19 cut its earnings to $1.60 billion, or $3.09 a share, in 2020.
Now that hospitals are returning to normal operations, Baxter’s revenue in the third quarter of 2021 rose 8.5%, to $3.23 billion from $2.97 billion a year earlier. The company’s role as a manufacturer of COVID-19 vaccines also contributed to that gain. Earnings in the quarter jumped 19.7%, to $516 million from $431 million. Per-share earnings gained 22.9%, to $1.02 from $0.83, on fewer shares outstanding.
Baxter is now buying Hill-Rom Holdings Inc. (HRC). Based in Chicago, Hill-Rom makes a variety of medical care devices and products, including intensive-care unit beds, operating tables, patient monitoring equipment and electronic diagnostic systems. If you include Hill-Rom’s debt, the price is $12.4 billion. Baxter expects to complete the deal in early 2022.
Hill-Rom is a well-established leader in its niche markets, which cuts the risk of this purchase. As well, eliminating overlapping operations should cut $250 million from Baxter’s annual costs by the end of the third year. Those savings are poised to lift annual earnings per share by 10% in the first year, rising to 20% by the end of the third year.
Baxter ended the latest quarter with cash of $3.26 billion, so it will borrow $11.4 billion to fund the Hill-Rom acquisition. That will increase its debt to around $16.8 billion, which is still a manageable 43% of its market.
The new operations should also let the company keep raising your dividend; the current annual rate of $1.12 a share yields 1.4%. Earnings in 2021 should rise about 16.5% to $3.60 a share, and the stock trades at a reasonable 21.7 times that estimate.
Baxter is a buy.
Patrick McKeough, Wall Street Stock Forecaster, tsinetwork.ca, 888-292-0296, December 2021