Baxter International is making a major strategic shift as it divests $7.8 billion in assets to sharpen its focus on high-margin hospital equipment. Streamlined operations will improve its efficiency and profitability as it pays down debt with strong cash flow.
We feel the current valuation doesn’t reflect this improved business model as the stock trades at a modest 12.2 times the company’s forward earnings forecast.
BAXTER INTERNATIONAL INC. (New York symbol BAX; www.baxter.com) makes a variety of medical devices, including intravenous pumps and kidney-dialysis equipment.
Under a new strategy to narrow its focus to specialized equipment for hospitals, including intensive-care-unit beds, operating tables, patient monitoring equipment and electronic diagnostic systems, Baxter is shedding some of its other businesses.
In September 2023, the company sold its BioPharma division to private-equity firms Advent International and Warburg Pincus for $4.25 billion (or $3.4 billion after taxes).
Baxter has also agreed to sell its Renal Care and Acute Therapies unit to investment firm Carlyle Group Inc. (New York symbol CG). Called Vantive, that business makes kidney dialysis machines and related equipment; it accounts for 30% of Baxter’s total revenue.
The company originally planned to hand out shares in Vantive to its own shareholders later this year, but it has now opted for a sale.
Baxter will receive $3.8 billion for Vantive when it completes the transaction in late 2024 or early 2025. It will use the cash to pay down its long-term debt of $10.44 billion, which is equal to 57% of its market cap.
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Growth Stocks: Sale will improve the Baxter’s new product focus
As a result of this sale and others in the past year, Baxter now focuses on specialized equipment for hospitals, including intensive-care-unit beds, operating tables, patient monitoring equipment and electronic diagnostic systems. The company expects its revenue will rise between 4% and 5% annually.
Meanwhile, Baxter’s revenue in the quarter ended June 30, 2024, rose 2.8%, to $3.81 billion from $3.71 billion a year earlier. That beat the consensus forecast of $3.76 billion.
The higher revenue is largely due to the launch of new products and higher selling prices. The rising number of non-urgent medical procedures, such as hip and knee replacements, that has continued in the wake of the COVID-19 pandemic is also spurring demand for Baxter’s products.
The company continues to benefit from improving supply chains and better efficiency. Its earnings before unusual items improved 23.6%, to $0.68 a share (or a total of $348 million) from $0.55 a share (or $282 million). That beat the consensus estimate of $0.66.
Baxter now expects to earn between $2.93 and $3.01 a share for all of 2024. The stock trades at 12.2 times the midpoint of that range, which is a low p/e in light of its high market share and high research spending (4.5% of revenue). The $1.16 dividend yields a solid 3.2%.
Recommendation in Spinoffs & Takeovers: Baxter International Inc. is a buy.
