Understanding Baxter’s Updated 2020 Guidance: Where’s the Momentum?
During its 2Q17 earnings release on July 27, 2017, Baxter International (BAX) updated its guidance for fiscal 2017 and its financial outlook for fiscal 2020. The company based its updated guidance on continued strong operational execution.
BAX’s operational transformation initiatives, its portfolio optimization efforts, and its productivity enhancement have led to a better-bottom line performance. The company undertook a number of strategic divestments in 2017 and is constantly looking for opportunities to position itself as a leaner and more focused organization with strong core capabilities.
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Updated financial metrics
Baxter expects to register adjusted diluted EPS (earnings per share) in the range of $3.25–$3.40 per share in fiscal 2020, compared with its previous guidance range of $2.75–$3.00. An annual sales growth rate of higher than 4% is expected in 2020.
BAX’s adjusted operating margin is expected to rise as well and come in at ~20%, compared with the previous outlook of 17%–18%, due to improved manufacturing processes and optimization initiatives.
BAX’s cash flows are also expected to rise substantially, and its balance sheet is expected to strengthen by 2020. The company expects to generate more than $2.6 billion in operating cash flows. BAX’s capital expenditure is estimated to fall, which could result in increased cash flows to the tune of $250 million.
Peers and ETFs
Peers Becton, Dickinson, and Company (BDX), Thermo Fisher Scientific (TMO), and Abbott Laboratories (ABT) are expected to generate free cash flows of around $1 billion, $3.1 billion, and $4.4 billion, respectively in fiscal 2017.
Investors can gain long-term exposure to Baxter International while avoiding company-specific risks by investing in the iShares Edge MSCI Min Vol USA ETF (USMV), which has ~0.67% of its total holdings in BAX.