Baxter Earnings: Mildly Exceeds Cautious Expectations on Improving Medical Utilization

Narrow-moat Baxter BAX mildly exceeded expectations in the third quarter, and management largely maintained its 2023 outlook. Our near-term estimates remain roughly in line with these expectations, and we are keeping our $67 fair value estimate intact, well above recent trades.

Underlying trends appear to be improving a bit, although there remains significant room for improvement. Sales grew 2% in constant currency, led by the newly formed medical products and therapies (4% constant currency growth) and pharmaceuticals (9%) businesses that well helped by rising medical utilization. The healthcare systems and technologies group (primarily consisting of former Hillrom businesses) was flat year over year, as a higher interest-rate environment may be negatively affecting hospital capital spending. Baxter’s kidney care segment was flat relative to a tough comparable period, reflecting weakness in China and the exit of a distribution agreement. Adjusted EPS on continuing operations declined 4% to $0.68, which was mildly higher than the $0.65 to $0.67 that management was expecting. These results still include elevated supply costs, such as in electromechanical parts for infusion pumps and smart beds that were procured last year and are flowing through the income statement, although those pressures appear to be easing.

Looking forward, Baxter largely kept its outlook for 2023 intact, and analysts tried to extract initial views for 2024 from management on the call. Although no guidance for 2024 was given, the commentary suggests that slightly higher organic revenue growth is possible in 2024 than the 2% expected in 2023. Also, margin expansion initiatives will remain in force and could help Baxter’s bottom line expand more rapidly than the top line, although the recent BPS divestiture may muddy the comparable period a bit.