Spinoffs are a great way for companies to sharpen their focus on the more-profitable segments of their businesses. Baxter Int’l is a recent example, one we feel will pay off for investors over the next few years.
While the company is down 33% in the past year as its latest acquisition has failed to live up to market expectations, COVID-19 pandemic easing should spur demand for their products as hospitals resume regular medical procedures.
Meanwhile, the stock trades at 16.2 times the company’s 2023 earnings forecast.
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BAXTER INTERNATIONAL INC. (New York symbol BAX; www.baxter.com) makes a wide range of medical devices, including intravenous pumps and kidney-dialysis equipment.
In late 2021, Baxter acquired Hill-Rom Holdings Inc. for $10.5 billion. Based in Chicago, Hill-Rom makes a variety of medical care devices and products, including intensive-care-unit beds, operating tables, patient monitoring equipment and electronic diagnostic systems.
Baxter’s revenue in the quarter ended March 31, 2023, fell 1.6%, to $3.65 billion from $3.71 billion a year earlier. Even so, that topped the consensus forecast of $3.60 billion.
However, if you factor out currency rates, revenue improved 2%.
Earnings before unusual items also fell 36.6%, to $0.59 a share (or a total of $297 million) from $0.93 a share (or $471 million) a year earlier. That’s due to higher interest costs, as well as higher prices for raw materials and transportation. The latest earnings figure also beat the consensus estimate of $0.49 a share.
Growth Stocks: Earnings may drop but a key spinoff is on the way for Baxter Int’l
The company now plans to cut 5% of its workforce as part of a broader cost-cutting plan. That should save it $300 million in 2023.
Even so, Baxter expects elevated operating costs will cut its earnings in 2023 by about 16% to $2.93 a share. The stock trades at a moderate 16.2 times Baxter’s new forecast. The $1.16 dividend looks safe and yields 2.5%.
The company still plans to spin off its Renal Care and Acute Therapies businesses as a separate, publicly traded company in 2024. Baxter is also conducting a strategic review of its BioPharma Solutions business, which provides contract manufacturing services to the healthcare industry. This could lead to its sale or merger with another firm.
The remaining operations will focus on making specialized equipment for hospitals.
Like most spinoffs, we feel this breakup will pay off for investors over the next few years.
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