Second Quarter Review
Baxter International (BAX) announced mixed results for the second quarter of 2010 on July 22. Adjusted (excluding one-time items) earnings per share were 93 cents, narrowly beating the Zacks Consensus Estimate of 92 cents, but coming below the year-ago result of 96 cents.
Total revenues moved up sluggishly to $3.2 billion, up 2% year over year, matching the Zacks Consensus Estimate. The negative triggers impacting revenue growth included higher rebates for Medicaid necessitated by healthcare reform and lower revenues from vaccines, antibody therapies and hemophilia tenders in the overseas markets. The plasma proteins business also continued to face structural and pricing problems with declining sales in the second quarter.
We have discussed the quarterly results at length here:
http://www.zacks.com/stock/news/37433/Baxter+Beats+by+a+Penny
Agreement – Estimate Revisions
Estimates for 2010 demonstrate an upward trend since the announcement of the second-quarter results, manifesting a clear directional agreement. Out of 14 analysts covering the stock, 6 raised their estimates for 2010, over the last 7 days with no negative revisions. The trend for 2011 is, however, somewhat inconclusive with two cases of upward revision and four instances of negative revision over the last week.
The upswing in estimate revisions for 2010 is a reflection of improved sentiment toward Baxter following its reiteration of guidance for 2010. This stabilization in outlook comes after the company’s earlier downgrades. Further, the settlement with the U.S. Food & Drug Administration (FDA) of the long outstanding recall of COLLEAGUE infusion pump, removes a significant overhang on the stock.
Magnitude – Consensus Estimate Trend
There has been an increase in estimates of 2 cents for 2010, and a decrease of 2 cents for 2011, over the last 7 days. The current Zacks Consensus Estimate for 2010 is $3.94, reflecting a 3.90% year-over-year increase.
Baxter is one of the largest pure-play, global, medical technology companies due to its diversified sales and market-leading position in several segments. However, we hold a mixed opinion about the prospects of the company.
Baxter’s strong cash flow expectations, experienced management team, and long-term potential derived from its robust pipeline give us a large measure of confidence. We also believe that the two-year transition period for the Colleague pump recall should allow for an orderly transition and enable Baxter to retain market share.
Baxter’s pipeline continues to impress with several products in advanced stages of development. During the second quarter, the FDA accepted the company’s Biologics License Application for its 10% liquid immunoglobulin therapy.
Further, management is expected to maintain a significant level of share repurchase activity in the second half of 2010, after completing its commitment for the year in the second quarter. We are pleased that, after previous downgrades of 2010 guidance, Baxter recently reiterated its guidance for the year.
Baxter depends on the EU for about a third of its sales. This is a cause for concern given recent fiscal tightening, a somber outlook for hospital spending and tightening of reimbursement. The outlook also remains slightly uneasy in the US, where demand for many products is soft with an expectation of further price cuts on account of health care reform.
Despite the optimism surrounding the settlement for the Colleague infusion pump, with the FDA, we believe both CareFusion (CFN) and Hospira (HSP) will now more actively target the approximately 190,000 Colleague pumps still in the domestic market, which can negatively impact Baxter’s performance. As such, we reiterate our Neutral rating on Baxter, which is supported by a Zacks #3 Rank (Hold).
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