BAXTER INTERNATIONAL INC. $38 (New York symbol BAX; WSSF Rating: Average) makes medical equipment through three main divisions: Medication Delivery makes intravenous equipment and systems; the Renal unit makes dialysis equipment; and the BioScience division makes various drugs as
well as equipment that separates blood plasma.

In 2005, the company had to recall 250,000 of its Colleague infusion pumps, which provide intravenous drugs to patients. A potential defect in the pump’s battery and air detection system could cause it to shut down. Baxter is working with the Food and Drug Administration (FDA) to fix the problem. Baxter sold $85 million worth of these pumps in the first half of 2005.

Baxter sees the recall as a minor setback. It’s still making these pumps, and now has 20,000 in inventory. That should help it quickly recapture lost sales once the FDA lifts its ban.

Due to the lack of Colleague sales, Baxter’s revenue in the three months ended March 31, 2006 rose just 1.3%, to $2.41 billion from $2.38 billion a year earlier. However, the company continues to do a good job of controlling its costs. Consequently, Baxter’s income from continuing operations rose 19.4%, to $0.43 a share (total $282 million) from $0.36 a share ($224 million).

Research spending in the most recent quarter rose 3.8%, to $138 million (5.7% of revenue) from $133 million (5.6% of revenue) a year earlier. This should help Baxter hang on to its leading market share in its core markets, as well as improve its share of niche markets.

Baxter also has high hopes for its new method of making vaccines. It now grows the needed flu virus in large fermenting tanks, instead of chicken eggs. This new method is much quicker, and also eliminates the cost of buying millions of eggs.

The company recently received a contract from the UK government for 2 million doses of bird flu vaccine. The chances of a bird flu pandemic are low, but this contract should help Baxter win more vaccine business from other countries.

The stock has stayed in a narrow range in the past year, and now trades at 17.8 times the $2.13 a share it should earn in 2006. The $0.58 dividend yields 1.5%.

Baxter is a buy.