Baxter shares (NYSE: BAX ) is down 32% this year, underperforming the broader S&P500 by 17%. Even looking at the longer term, BAX shares, with a -10% return from levels seen at the end of 2017, have underperformed the S&P 500 by 47%. After Baxter’s recent fall, we believe it now has some room for growth as outlined below.

This 10% decline in Baxter shares since the end of 2017 can be attributed primarily to this 1. 33% decline in the company’s P/S ratio to currently 2.1x trailing earnings compared to 3.1x in 2017, 2. 11% increase in total shares outstanding to 504 million, partially offset 3. Baxter’s revenue up 34% to $14.2 billion over the trailing twelve months, compared to $10.6 billion in 2017. Growth in sales and shares outstanding meant Baxter’s earnings per share rose only 20% over the trailing twelve months to 28 $.16 vs. $23.38 in 2017 Our dashboard is on Why Baxter Stock Moved has more details.

Baxter’s revenue growth in recent years has been driven by increased demand for its advanced surgical products. In December 2021, Baxter completed the acquisition of Hillrom, which added connected care offerings, including smart beds and patient monitoring products, to Baxter’s existing portfolio of acute, nutritional, renal, hospital and surgical care products. The Hillrom acquisition is expected to be low double-digit EPS accretive through 2023 and even higher in subsequent years.

Baxter is seeing net margins decline with higher inflation resulting in increased raw material costs and supply chain disruptions also weighing on margin growth. For perspective, the company reported a 56% year-over-year increase in SG&A expenses in the first half of 2022, compared to a 23% increase in total sales. Baxter’s operating margins are currently down to 6.4%, compared to 11.6% in 2017 and 15.0% in 2019, before the pandemic. Our Comparison of Baxter’s Operating Income the dashboard has more details.

Looking at BAX inventory, we estimate Baxter Awards to be $64 per share, reflecting a 10% increase from the current market price of $58. At current levels, BAX shares are trading at 1.9 times forward earnings, compared to an average of 3.3 times over the past three years, meaning it has more room to grow. This means that we do not expect significant growth from current levels, partly due to the decline in operating margin. Although the company expects its operating margin to improve in the coming years, it will depend on its integration with Hill-Rom, while it will continue to face inflationary headwinds in the near term.

While BAX stock looks like it has more room to grow, it’s useful to see how Baxter’s Peers pricing on the metrics that matter. Additional valuable comparisons for companies across industries can be found at Peer Comparison.

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