Strong Demand In Advanced Surgery And Specialty Injectables Will Boost Future Performance

Key Takeaways

• A new verticalized operating model and strategic divestitures will enhance focus, boosting margins and driving profitable growth.
  
• Investments in innovation and new product launches are set to increase sales volumes and improve revenue growth.
  
• Leadership uncertainty and divestitures, coupled with supply chain disruptions and pricing pressures, could challenge Baxter's earnings and operational efficiency.

Catalysts

Through its subsidiaries, provides a portfolio of healthcare products in the United States.

• Baxter International has implemented a new verticalized operating model aimed at increasing focus and execution, which is expected to lead to greater clarity, agility, and profitable growth. This is likely to drive revenue growth and enhance net margins.
  
• The completion of strategic divestitures, such as the sale of non-core BioPharma Solutions and the upcoming divestiture of the Kidney Care business, positions Baxter to concentrate on core competencies and accelerate innovation, potentially boosting earnings and improving margins.
  
• Baxter's ongoing investments in innovation, such as the Novum IQ infusion pump platform, are anticipated to build momentum, leading to increased sales volumes and potentially higher revenue in 2025 and beyond.
  
• Positive pricing actions within Baxter's U.S. GPO contracts and new product launches are expected to drive revenue growth and improve operating margins by leveraging a more favorable product mix.
  
• Strong demand across product segments, such as advanced surgery and specialty injectables, coupled with new product launches, are anticipated to contribute to revenue growth and operational performance, bolstering overall earnings.

Baxter International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Baxter International's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.2% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $2.06) by about March 2028, up from $-337.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.9x on those 2028 earnings, up from -55.5x today. This future PE is lower than the current PE for the US Medical Equipment industry at 32.2x.
• Analysts expect the number of shares outstanding to grow by 0.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.24%, as per the Simply Wall St company report.

Baxter International Future Earnings Per Share Growth

Risks

• Baxter's recent transition involves the reshuffling of its leadership team, with the search for a permanent CEO still ongoing. This leadership uncertainty could lead to strategic drift or changes that potentially affect earnings or operational efficiency.
  
• The company has undergone significant divestitures, including the sale of its Vantive and BioPharma Solutions businesses. These strategic exits might initially disrupt revenue streams and operational focus. The long-term impact on earnings will depend on the successful reinvestment of proceeds and stabilization of the remaining operations.
  
• Supply chain disruptions due to events like Hurricane Helene have had a material impact on sales and margin performance. Although the company demonstrated resilience, any future disruptions could again affect revenues and operational margins.
  
• The transition away from the IV Solutions business in China and associated tariffs could negatively impact Baxter's revenue growth and necessitate efforts to offset these losses, thereby placing pressure on net margins and earnings.
  
• The competitive landscape and pricing pressures, particularly in the U.S. markets, necessitate strategic maneuvers that may increase operational expenses, impacting Baxter's net margins and potentially diluting near-term earnings growth.

Valuation

• The analysts have a consensus price target of $40.042 for Baxter International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $57.82, and the most bearish reporting a price target of just $30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.1 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $36.57, the analyst price target of $40.04 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.