Baxter (BAX)

Healthcare company Baxter International (NYSE:BAX) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 5.4% year on year to $2.63 billion. On the other hand, next quarter’s revenue guidance of $2.82 billion was less impressive, coming in 0.5% below analysts’ estimates. Its non-GAAP profit of $0.55 per share was 13.8% above analysts’ consensus estimates.

Company Overview

With a history dating back to 1931 and products used in over 100 countries, Baxter International (NYSE:BAX) provides essential healthcare products including dialysis therapies, IV solutions, infusion systems, surgical products, and patient monitoring technologies to hospitals and clinics worldwide.

The medical devices industry operates a business model that balances steady demand with significant investments in innovation and regulatory compliance. The industry benefits from recurring revenue streams tied to consumables, maintenance services, and incremental upgrades to the latest technologies. However, the capital-intensive nature of product development, coupled with lengthy regulatory pathways and the need for clinical validation, can weigh on profitability and timelines. In addition, there are constant pricing pressures from healthcare systems and insurers maximizing cost efficiency. Over the next several years, one tailwind is demographic–aging populations means rising chronic disease rates that drive greater demand for medical interventions and monitoring solutions. Advances in digital health, such as remote patient monitoring and smart devices, are also expected to unlock new demand by shortening upgrade cycles. On the other hand, the industry faces headwinds from pricing and reimbursement pressures as healthcare providers increasingly adopt value-based care models. Additionally, the integration of cybersecurity for connected devices adds further risk and complexity for device manufacturers.

Baxter International competes with several major healthcare companies including Fresenius Medical Care (NYSE:FMS) in dialysis products, Becton Dickinson (NYSE:BDX) in IV solutions and infusion systems, Medtronic (NYSE:MDT) in patient monitoring, and B. Braun in IV and surgical products.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $10.77 billion in revenue over the past 12 months, Baxter has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Baxter struggled to consistently generate demand over the last five years as its sales dropped at a 1.3% annual rate. This was below our standards and is a sign of poor business quality.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Baxter’s recent performance shows its demand remained suppressed as its revenue has declined by 10.3% annually over the last two years.

Baxter also reports sales performance excluding currency movements, which are outside the company’s control and not indicative of demand. Over the last two years, its constant currency sales averaged 3.9% year-on-year growth. Because this number is better than its normal revenue growth, we can see that foreign exchange rates have been a headwind for Baxter.

This quarter, Baxter reported year-on-year revenue growth of 5.4%, and its $2.63 billion of revenue exceeded Wall Street’s estimates by 1.9%. Company management is currently guiding for a 4.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 5.2% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and implies its newer products and services will fuel better top-line performance.

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Baxter has managed its cost base well over the last five years. It demonstrated solid profitability for a healthcare business, producing an average adjusted operating margin of 16.1%.

Looking at the trend in its profitability, Baxter’s adjusted operating margin decreased by 3 percentage points over the last five years. A silver lining is that on a two-year basis, its margin has stabilized. Still, shareholders will want to see Baxter become more profitable in the future.

In Q1, Baxter generated an adjusted operating profit margin of 14.9%, up 2.6 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Baxter, its EPS declined by 9.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

We can take a deeper look into Baxter’s earnings to better understand the drivers of its performance. As we mentioned earlier, Baxter’s adjusted operating margin improved this quarter but declined by 3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Baxter reported EPS at $0.55, up from $0.36 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Baxter’s full-year EPS of $2.08 to grow 21.4%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Baxter has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 8.2% over the last five years, slightly better than the broader healthcare sector.

Taking a step back, we can see that Baxter’s margin dropped by 4.7 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Baxter historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 2.2%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Baxter’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Baxter reported $0 of cash and $0 of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.37 billion of EBITDA over the last 12 months, we view Baxter’s 0.0× net-debt-to-EBITDA ratio as safe. We also see its $27 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Baxter blew past analysts’ constant currency revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter slightly missed. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 1.1% to $31.50 immediately following the results.

Updated: May 16, 2025 at 11:53 PM EDT

Before investing in or passing on Baxter, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Baxter doesn’t pass our quality test. To begin with, its revenue has declined over the last five years. And while its operating margins are in line with the overall healthcare sector, the downside is its declining EPS over the last five years makes it a less attractive asset to the public markets. On top of that, its diminishing returns show management's prior bets haven't worked out.

Baxter’s P/E ratio based on the next 12 months is 12.6x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $38.68 on the company (compared to the current share price of $31.21).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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