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Morningstar | Baxter's margin expansion goal looks ambitious, but efforts so far have exceeded our expectations.

Baxter has faced a number of near-term challenges following the spin-off of Baxalta, but we think growth should remain relatively stable going forward as management attempts to boost profitability, which had been lower than those of close peers like Fresenius, Hospira (acquired by Pfizer), or CareFusion (acquired by Becton Dickinson). Thanks to the company's competitive advantages in the dialysis and hospital markets, we give decent odds for margin expansion gains over the coming years.A number of factors have depressed Baxter's historical cash flows, but recent better-than-expected margin expansion efforts offer evidence of future profitability gains. Generic competition for branded oncology drug cyclophosphamide at the end of 2014, currency headwinds, dis-synergies from the Baxalta split, regulatory and manufacturing issues, and pension expense adjustments have weighed on historical earnings. Beyond these mostly temporary issues, we think management's restructuring efforts should continue to improve profitability thanks to synergies from the Gambro acquisition, optimizing manufacturing and distribution operations, exiting unprofitable business lines, and refocusing on new product launches and higher-margin segments (nutrition, anesthetics, and biosurgery). Meanwhile, capital expenditures have declined as the company worked through regulatory issues and expanding manufacturing capacity for solution products. Emerging-market exposure and healthy demand for many of Baxter's critical consumables support reasonably healthy long-term growth for Baxter. About 60% of the company's sales are in international markets, with emerging markets making up an impressive 25% of sales. At nearly one third of new Baxter revenue, the renal segment, which is particularly exposed to international markets, should boost the company's growth trajectory. Thanks to rising global rates of diabetes, obesity, and high blood pressure, increasing global demand for dialysis should sustain strong dialysis market growth. This is especially true for Baxter's peritoneal dialysis operations in global markets where clinic infrastructure typically does not match that of the United States or Europe.