Over the past six months, Baxter’s shares (currently trading at $27.77) have posted a disappointing 11.8% loss, well below the S&P 500’s 4.1% gain. This may have investors wondering how to approach the situation.
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 though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why BAX doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall 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 wasn’t a great result and is a sign of poor business quality. 
2. Weak Constant Currency Growth Points to Soft Demand
Investors interested in Medical Devices & Supplies - Diversified companies should track constant currency revenue in addition to reported 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 4.1% 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. 
3. 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 4.7% 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.
Final Judgment
Baxter falls short of our quality standards. After the recent drawdown, the stock trades at 11× forward P/E (or $27.77 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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