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Baxter Remains Neutral

Zacks Equity Research

We reiterate our Neutral recommendation on Baxter International (BAX). Earnings per share of $1.12 for the second quarter beat the Zacks Consensus Estimate by a penny. Reported profit was $661 million (or $1.19 per share), up about 7% year over year.

Baxter’s results in the reported quarter include a net post-tax special benefit of about $42 million (or $0.07 per share) related to business developmental activities.

Revenues edged up 1% year over year (up 4% in constant currency) to $3,572 million, sailing past the Zacks Consensus Estimate of $3,538 million.

On a geographic basis, U.S.-based revenues in the quarter increased 6% to $1,503 million while international revenues decreased 2% year over year (up 3% in constant currency) to $2,069 million.

In November 2011, Baxter completed its acquisition of Baxa Corporation. The takeover highlights the company’s continued commitment toward patient safety and nutrition. It also permits Baxter to provide a wider set of solutions for the safe preparation and delivery of IV medication. Baxa’s know-how will benefit patients across the globe.

Moreover, Baxter struck a deal in December 2011 to buy Synovis Life Technologies, a well-known provider of mechanical and biological products for the repair of soft tissue in a large number of surgical operations.

The acquisition will further expand Baxter’s offerings in the area of biosurgery and regenerative treatment. The takeover of Synovis was completed in the first quarter of 2012.

Despite resilience in Plasma Proteins and Antibody Therapy sub-segments, we are concerned about a slightly somber outlook for hospital spending and tightening of reimbursement. We also account for the unfavorable impact of foreign exchange translation and possible dilution associated with the company’s acquisitions of Baxa and Synovis.

Improved execution has lifted sentiment somewhat toward Baxter. It is a good bet for value investors willing to wait as fundamentals improve further. Among others, the company competes with Becton, Dickinson and Company (BDX) in certain niches. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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