Baxter International: Another YoY Earnings Decline Expected, Shares Tag Support (NYSE:BAX)

Health Care sector stocks have gotten walloped on a relative basis to kickstart 2023. The group was seen as a safety trade during a turbulent 2022, but a risk-on, growth-seeking mindset on Wall Street has left Health Care in the dust.

One medical equipment/tech firm was already on the downhill, and the stock may have found modest support as it hopes to turn things around. Let’s find out if Baxter is a buy now after a protracted downtrend.

Health Care Needs A Lifeline

According to Bank of America Global Research, Baxter International (NYSE: BAX) manufactures a broad range of essential healthcare products across the continuum of care including chronic dialysis therapies, premixed drugs, IV nutrition products, infusion pumps, inhalation anesthetics, patient monitoring devices, and care communications devices. The company acquired Hillrom in December 2021.

The Illinois-based $23.7 billion market cap Health Care Equipment & Supplies industry company within the Health Care sector does not have positive trailing 12-month GAAP earnings and pays a 2.5% dividend yield, according to The Wall Street Journal.

The firm faces headwinds compared to other medtech companies as hospitals may pare back on capital projects – a significant sales risk to Baxter. Much of that concern might be baked in by now, however. As part of a restructuring plan, the firm is spinning off its renal care business – a move I like to see so that it can streamline business units. Some favorable news for BAX shareholders is that the stock was named one of Goldman’s top ROE picks for 2023. But that came shortly after BofA downgraded the medtech name. The sellside is mixed on Baxter. What I find favorable for the firm is that inflation risks are easing, and that should help alleviate some of the cost pressures.

On valuation, analysts at BofA see earnings falling another 2% this year after a modest operating EPS drop last year. Per-share profits should then rebound by a healthier clip in 2024. The Bloomberg consensus forecast is about on par with what BofA projects. Dividends, henceforth, are seen as rising steadily through 2024.

With a better yield today and an operating earnings multiple drifting into the low teens, BAX’s stock begins to look attractive so long as earnings indeed recover before long. While its EV/EBTIDA ratio is no bargain, the firm has a near-market free cash flow yield. On the bullish side of the ledger, Baxter now trades at just 1.58 times sales – a nearly 50% discount to its 5-year average of 3.2. On valuation, I’m upgrading the stock to a hold here.

Baxter: Earnings, Valuation, Dividend Yield Forecasts

Looking ahead, corporate event data from Wall Street Horizon shows a confirmed Q4 2022 earnings date of Thursday, February 9, before the open with a conference call immediately after results cross the wires. You can listen live here. The calendar is light on volatility catalysts aside from the earnings date.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) shows a consensus EPS forecast of $0.94 which would be a 10% decline from $1.04 of per-share profits earned in the same quarter a year ago. Remarkably, and you don’t see this often, the stock has traded lower post-earnings following each of the previous 11 reports. Don’t fight the trend here. That flies in the face of a string of bottom-line beats (nine to be exact).

As far as the expected earnings move, the at-the-money straddle expired soonest after the report showed a small 4.5% swing. Given a pair of sizable earnings reactions, I’m inclined to be long premium ahead of results. A bearish bet could be the play, but taking profits on puts soon after earnings hit the tape could be a prudent move. Find out more in the technical take.

BAX: Dreadful Earnings Reaction History

The Technical Take

Back in October, I cited bearish trends in Baxter’s stock and that the low $40s should prove to be support. That has in fact borne out in price action over the last few months. Notice in the chart below that shares dipped to $43 but have since bounced ever so modestly above $46.

This is by no means a trend reversal – consider that the broad market has rallied much more than BAX across a slew of timeframes. Still, a long position here with a stop under, say, $40 could work. I see resistance near $63, so it’s not a terrible risk reward. There is no question the trend remains firmly lower, so avoiding the name altogether is a fine move according to the chart, too.

BAX: Finding Long-Term Support. $63 resistance.

The Bottom Line

The risk and upside potential has turned mixed on Baxter. A poor earnings reaction history is a major near-term peril, but shares are near a decent valuation after the stock plunged to long-term support.