Baxter International Offers Healthy Returns - Barron's

Health-care giant Baxter International (BAX) might be just the cure for investors sick of anemic returns, writes Barron's Sandra Ward. The company delivered double-digit earnings growth last year and is expected to repeat the performance this year.

Baxter has forecast 2009 sales growth of 7%, excluding the effects of foreign-exchange, with an expected cash flow over $2.6B. Fully diluted earnings, before special items, are expected to be between $3.70-$3.78 per share, up from $3.38 last year. The stock has done reasonably well in a very weak market, trading at roughly the same level it did a year ago until shares dipped a few days ago. Trading around $51 now, there's a strong case to be made that shares will reach $65 by year's end on strong earnings growth, margin expansion and continued share buybacks.

Baxter has kept earnings strong while still investing in R&D. Its R&D spending has roughly doubled since 2004, to an estimated $1B this year. One promising development has been Gammagard Liquid, which early tests have shown could be useful in slowing cognitive deterioration in Alzheimer's patients, a potential multibillion market.

Fans say Baxter's diversified line of businesses, fortress-like balance sheet and solid free cash flow justify its slight premium to other medical-technology companies. Much of the credit goes to Robert Parkinson, chairman and CEO. Under his leadership, Baxter's biosciences business has become a powerhouse, producing $5.3B in sales in 2008, or 44% of Baxter's total sales.

60% of sales come from abroad, so the company is exposed to foreign-exchange issues. Some analysts expect a $0.10-$0.15 shortfall in 2009 earnings as a result of currency fluctuations. Although Baxter isn't immune to the economic downturn, many view its products, such as IV solutions and bags as well as anesthesia products, as nondiscretionary.

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• Baxter International: Q4 EPS of $0.91 beats by $0.02. Revenue of $3.13B (+4.1%) vs. $3.15B. (PR)
• After years of focusing on organic growth, Baxter says it's considering outside deals: "It may be a more target-rich environment right now," CEO Robert Parkinson says on call. While not losing sight of margin expansion, he sees the chance to "be a bit more expansive in evaluating opportunities and perhaps bringing things in."