Baxter Beats Fair and Square - Analyst Blog

Baxter International Inc. (BAX) reported first-quarter 2011 adjusted (excluding one-time items) earnings per share of 98 cents, beating the corresponding Zacks Consensus Estimate of 93 cents, and surpassing the year-ago results also of 93 cents. The results exceeded Baxter’s earlier guidance of 92 cents to 94 cents.

Baxter reported profit of $570 million (or 98 cents a share) in the quarter versus a loss of $63 million (or 11 cents a share) a year ago. Its first quarter results in 2010 included after-tax special items aggregating $627 million (or $1.04 per share) arising from the Colleague infusion pump and a change in certain tax treatment.

The forecast-topping results, coupled with the company’s upward revisions to guidance, pushed up its shares $1.48 (2.71%) to $56 in early trading on April 21.

Revenues

Total revenues were $3,284 million in the first quarter, up 12% year over year, beating the Zacks Consensus Estimate of $3,178 million. Revenues in the prior year included an adjustment of $213 million for the Colleague infusion pump. Excluding this adjustment, worldwide sales grew 5% year over year. Domestic revenues for the quarter jumped 10% to $1,422 million while overseas sales were higher 1% to $1,862 million.

Segment-wise Revenue Analysis

With regard to segment performance, Bioscience revenues totaled $1,408 million, up 3% (up 4% in constant currency) year over year. The better performance was attributable to higher demand for Gammagard Liquid, several specialty plasma-based therapeutics and biosurgery products.

The largest sub-segment, Recombinants, had sales of $512 million, flat in reported terms (up 1% in constant currency) year over year. The Plasma Proteins business, where Baxter had encountered structural problems in the past, performed well with revenues of $308 million, up 5% (up 8% in constant currency) year over year. Antibody Therapy performed sharply better with sales of $374 million, climbing 16% (up 18% in constant currency) year over year.

Revenues from Medication Delivery went up steeply by 20% year over year (up 19% in constant currency), to $1,868 million, riding on growth in intravenous and nutritional therapies as well as a broad range of generic and pre-mixed injectable drugs. This segment now includes Renal products.  

The three prominent sub-segments were Renal with revenues of $587 million, down 1% in constant currency; IV Therapies with sales of $428 million, up 10% in constant currency basis; and Global Injectables with revenues of $517 million, up 14% in constant currency.

Margins

Gross margin was 51% in the first quarter, down from 51.9% in the year-ago quarter. Marketing and administrative expense, expressed as a percentage of sales, was flat at 21.8% while research and development expense dropped to 6.5% from 7.2% in the year-ago quarter.

Balance Sheet

Cash and cash equivalents totaled $2,168 million, as of March 31, 2011, down 18.9% year over year. Net debt totaled $2,206 million, up 6.1% year over year.

Outlook and Recommendation

Baxter issued its guidance for second-quarter fiscal 2011 and raised its estimates for 2011. For the second quarter, the company expects growth in revenues in the range of 4% to 5% in constant currency, and adjusted earnings per share in the range of $1.01 to $1.03.

Baxter anticipates growth in revenues in the range of 3% to 4% (earlier 2% to 3%), in constant currency, and adjusted earnings per share of about $4.20 to $4.28 (earlier $4.15 to $4.25) for fiscal 2011. The current Zacks Consensus Estimates are $1.01 and $4.20 per share for the second quarter and fiscal 2011, respectively. 

The news regarding Baxter remains mixed. Its pipeline remains strong. 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.

On the flip side, despite recent improvement in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about stagnation in sales, a still somber outlook for some 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. Among others, it competes with Becton, Dickinson and Company (BDX) and Talecris Biotherapeutics Holdings Corp. (TLCR) in certain niches. We currently have a Neutral long-term rating on Baxter. The stock currently retains a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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