Baxter A Healthy Healthcare Holding

By Ryan C. Fuhrmann | April 14, 2009 AAA

So far this earnings season, major healthcare companies are reporting anemic top-line trends as a strong U.S. dollar deflates international sales trends. Profit trends are holding up so far, but certain players are likely to hold up better should global economic growth continue to be uncertain. Baxter International (NYSE:BAX) is one of those players, and recent results indicate it could be a healthy addition to most investor portfolios.

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First-Quarter Results
Baxter's reported sales fell 2% to $2.8 billion as a strong U.S. dollar more than offset what would have been 6% growth when excluding foreign exchange fluctuations. In terms of geography, U.S. sales improved 5%, demonstrating the stability of Baxter's top line in the midst of a recession. International sales also grew 7% when excluding currency impacts but fell 7% when including them. Last year, 60% of Baxter's revenue stemmed from overseas.

Baxter operates three primary segments. Reported medication delivery sales fell 3% to $1 billion (36% of total sales), renal sales fell 8% to $515 million (18%) and bioscience sales increased 3% to $1.3 billion (46%). Again, sales across the board were positive when removing currency changes. Of particular strength were U.S. bioscience sales, up 14%, though U.S. renal sales lagged all other divisions, falling 6%. (Will a rising or falling dollar hurt you or your company? Read The Impact Of Currency Conversions for more.)

Outlook
When stripping out one-time charges in last year's quarter, diluted earnings per share grew 12% to 83 cents. This was due primarily to a 470 basis point increase in gross margins to 52.7% of sales and a 5% fall in marketing and administrative costs. Earnings beat analyst projections by a couple of pennies. Forward company guidance calls for Q2 earnings per share of 93 cents to 95 cents and full-year earnings of $3.72 to $3.78.

Baxter's Premium Warranted Given Product Mix
That puts Baxter's share price at just under 13 times forward earnings projections. By comparison, Johnson & Johnson (NYSE:JNJ) is trading at just under 12 times projections for the coming year. Both are healthcare bellwethers, and Baxter's premium is arguably warranted given that its product mix spans more basic healthcare supplies and devices needed to "sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma and other chronic and acute medical conditions". J&J sells similar products but is more susceptible to branded pharmaceuticals and major medical devices. (Learn how to find a healthy pharmaceutical investment in a market full of weak drugs; see Measuring The Medicine Makers.)

Final Thoughts
Baxter is frequently compared to J&J and other large pharma players, but more appropriate peers include Becton Dickinson & Co. (NYSE:BDX), Hospira (NYSE:HSP) or Owens & Minor (NYSE:OMI). In general, these players are seeing more stable business trends, with both Becton and Hospira set to update investors with earnings releases on April 28. On April 20, Owens reported Q1 results that saw sales hold steady but earnings fall on a charge in its diabetes supply business. Stable top-line trends at rivals partly justify their mid-teens forward P/E ratios in what are still choppy economic waters. However, Baxter's strong organic sales, profit growth and slightly more favorable valuation make it a core healthcare holding for appropriate investment portfolios.

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