Tickers in this Article: BAX, MDT, STJ, JNJ, BDX
Medical instrument and supply firm Baxter International (NYSE:BAX) reported second quarter profits ahead of analyst projections as its international sales continued to improve robustly. The stock's earnings valuation is pretty reasonable given the firm's growth outlook, but several peers currently trade at arguably more appealing levels. (To learn more check out Investing In Medical Equipment Companies.)

TUTORIAL: Earnings Quality

Second Quarter Recap
Sales advanced 11% to $3.5 billion on a 5% improvement in the U.S. (40% of sales) and 15% reported growth internationally. Excluding currency fluctuations, overseas sales increased 7%. By each product segment, BioScience sales of plasma-based proteins to treat hemophilia and similar blood disorders jumped 14% to make up 44% of total sales. Medical Product sales consist of medication delivery systems, such as pre-filled vials and syringes and grew 8% to account for the rest of the top line. As of the start of the year, management combined its renal treatment and medical delivery units to create the medical products division.

Management was able to control costs and lower interest expense, helping to send pre-tax income up 20% to $803 million, or a very healthy 22.9% of sales. Higher income tax expense meant net income advanced only 15% to $615 million, but share buybacks boosted reported earnings by 19% to $1.07 per diluted share. This came in ahead of analyst projections.

Outlook
For the full year, Baxter projects modest sales growth of 3 to 4%, which strips out foreign exchange movements. Analysts currently expect total 2011 sales of almost $14 billion. Management increased its previous profit guidance range and now expects earnings between $4.22 and $4.30 per diluted share.

The Bottom Line
Baxter trades at a reasonable forward P/E of 13.1, but other large health care peers trade at even more appealing earnings multiples. For instance, medical device giant Medtronic (NYSE:MDT) trades at less than 10 times forward earnings. Diversified giant Johnson & Johnson (NYSE:JNJ) trades at only 13.4 times forward earnings, though investors have been waiting for sales and profit growth to perk up for some time. St Jude (NYSE:STJ), another medical device firm, trades at only a slightly higher forward multiple of 12 and has arguably more robust growth prospects. However, Baxter's valuation does compare favorably to Becton, Dickinson and Company (NYSE:BDX), which trades at a forward P/E closer to 14. (To help you determine what the earnings mean, read How To Evaluate The Quality Of EPS.)

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