Baxter trades at $22.13 and has moved in lockstep with the market. Its shares have returned 10% over the last six months while the S&P 500 has gained 8.7%.
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?
We’re cautious about Baxter. Here are three reasons we avoid BAX, plus one stock we’d rather own.
1. Weak Constant Currency Growth Points to Soft Demand
We can better understand Medical Devices & Supplies - Diversified companies by analyzing their constant currency revenue. 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 2.5% 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
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Baxter, its EPS declined by 7.2% 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 Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Baxter’s five-year average ROIC was negative 1.7%, 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. That said, the stock currently trades at 11.1× forward P/E (or $22.13 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
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