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Morningstar | Baxter Faces Some Road Bumps in 2Q, but Performance Appears On Track

Narrow-moat Baxter reported mixed second-quarter results as some lingering hurricane-related customer and supply-related matters led to revenue declines in the medication delivery and nutrition segments. Regardless, stable performance in Baxter’s other segments and revenue contributions from recent acquisitions, including Claris, bolstered the top line with 9% reported growth, or about 4% growth on an organic constant-currency basis. Adjusted operating margin reached 17.1%, or about 70 basis points above last year. Following Baxter’s recent investor day, we’ll likely pull our forecast margin assumptions forward, leading to an increase in our fair value estimate, even though management’s target for over a 23% operating margin seems aggressive considering profitability was in the single digits only a few years ago during the Baxalta spin. Management also anticipates the recent FDA warning letter at its Claris manufacturing facility will have no material consequence on the company’s financial targets, but we’d caution that these issues can often take longer and prove costlier than initial expectations.

Based on this quarter’s issues in medication delivery and nutritional segments, management’s maintenance of 4%-5% organic growth and 80-100 basis points of operating margin expansion for the year-end implies a potential rebound in growth over the back half of the year, most likely in the last quarter. We think Baxter’s year-end goals still appear achievable as recent supply issues in the previously mentioned medication delivery and nutrition segments get resolved. Otherwise, 4% renal segment and 10% acute therapy growth combined with high single digit organic growth in pharmaceuticals helped keep overall performance on track.