Morgan Stanley Finds A Few Reasons To Double Upgrade Baxter

Shares of Baxter International Inc BAX are trading at a valuation that implies low growth, but Morgan Stanley sees three catalysts ahead that will likely result in top-and-bottom line acceleration into 2020.

The Analyst

Morgan Stanley's David Lewis upgraded Baxter from Underweight to Overweight with a price target lifted from $66 to $77.

The Thesis

Baxter, a global medical products company, underperformed its medtech peers in 2018 but faces three key catalysts ahead to spur growth, Lewis said in a note.

First, the Medication Delivery and Nutrition businesses should benefit from continued stable pricing and some clinical practices to control usage showing signs of easing. Hospital customers should return to prior contractual arrangements, which were previously suspended by Baxter during supply shortages. A more friendly environment should result 3 to 4 percent growth in Medication Delivery and 2 to 3 percent growth in Nutrition versus expectations for a 2 percent decline for all of 2018.

Second, Baxter boasts the most flexible balance sheet among its large cap peers highlighted by 0.2 times net debt to EBITDA and an improving free cash flow model, the analyst wrote in the note. The company can deploy capital through tuck-in and medium-sized M&A deals to help drive growth and through share repurchases were likely "aggressive" late last year.

Finally, the stock's valuation of 13 times 2019 EBITDA implies a 3 to 4 percent weighted average market growth rate (WAMGR) and doesn't reflect the potential for the company to return to prior WAMGR rates of 4 to 5 percent in 2020 and beyond. In turn, this should help support multiple expansion.

Price Action

Shares of Baxter were trading around $65.26 Wednesday afternoon.

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Photo courtesy of Baxter.