What a brutal six months it’s been for Baxter. The stock has dropped 24.9% and now trades at $16.81, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Baxter, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Baxter Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons we avoid BAX and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Medical Devices & Supplies - Diversified companies. This metric excludes currency movements, which are outside of Baxter’s control and are not indicative of underlying demand.
Over the last two years, Baxter’s constant currency revenue averaged 3% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Baxter, its EPS declined by 6% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Baxter’s five-year average ROIC was negative 0.9%, meaning management lost money while trying to expand the business. Investors are likely hoping for a change soon.
Final Judgment
We cheer for all companies helping people live better, but in the case of Baxter, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 9× forward P/E (or $16.81 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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