New Blood at Baxter International

Baxter International ( BAX) took care of one major item of uncertainty for investors by hiring a new chairman and chief executive Monday.

On Thursday, the Deerfield, Ill., medical products company issues its first-quarter earnings report. But analysts believe the uncertainty will remain for several months until the new boss, Robert L. Parkinson, Jr., 53, has a chance to assess Baxter's product portfolio and prepare a plan for the future. Parkinson, who will join Baxter April 26, replaces Harry M. Jansen Kraemer, Jr., who announced his resignation Jan. 26. Kraemer remained with the company while a successor was being sought.

A few days ago, Baxter looked like a model for Wall Street uncertainty as neutral opinions outnumbered buy recommendations by 10 to 5, according to Thomson First Call. (There was one sell recommendation.) Parkinson's hiring won't improve the first quarter, but it definitely improved Wall Street's mood. Two investment banking firms raised their rating on the stock within 24 hours of Baxter's announcement.

The consensus opinion is for first-quarter earnings of $203.6 million, or 31 cents a share, on revenue of $2.15 billion. For the same period last year, the company reported earnings from continuing operations of $217 million, or 36 cents a share, on revenue of $2 billion.

The company beat the Wall Street consensus of 61 cents by a penny for the fourth quarter of 2003. But in three of the four previous quarters, Baxter failed to match Wall Street predictions.

Based on their comments prior to Thursday's conference call, analysts may focus more on Parkinson than on the previous quarter's results, even though Parkinson won't assume control until next week.

Parkinson "brings strong operations experience, which in our opinion is the key skill set needed at the helm of Baxter," said Lawrence Keusch, a Goldman Sachs analyst, in a research report Monday.

Parkinson spent 25 years at Abbott Laboratories ( ABT), rising to president and chief operating officer. Since 2002, he has been dean of Loyola University Chicago's School of Business Administration and its Graduate School of Business.

Because Abbott and Baxter both have businesses involving intravenous solutions and medication delivery, Parkinson "should get a running start at Baxter," said Keusch, who has an outperform rating on the stock. "We believe Mr. Parkinson will make the tough decisions." (Keusch doesn't own shares; his firm has had an investment banking relationship with Baxter in the past 12 months.)

Parkinson's experience "is a positive for the stock," said Glenn Reicin of Morgan Stanley, adding that Parkinson will conduct a comprehensive evaluation that "will likely lead to significant changes." Given that scenario and stock's current valuation, "we are not inclined to chase after the stock," said Reicin, who has an equal-weight rating on Baxter. (He doesn't own shares; his firm says it plans to receive or seek investment banking-related compensation in the next three months.)

Ben Andrew of William Blair & Co. told clients Tuesday that he raised his rating on Baxter -- to outperform from market perform -- because he believed Parkinson would accelerate cost-cutting efforts, given the "more conservative financial discipline" that Parkinson brings from Abbott Laboratories.

Although Baxter has been talking about cost savings in the range of $200 million to $300 million per year, Andrew said Baxter may soon announce cuts totaling at least $350 million. "With the news likely to improve from here, and the stock poised to break out of its recent trading range," Andrew decided to raise the stock's rating. (He doesn't own shares; his firm doesn't have an investment banking relationship with Baxter.)

Andrew added that he doesn't believe this year's financial results will be important "other than for how they suggest the company is positioned for 2005 and beyond."

Michael Weinstein of J.P. Morgan raised his stock rating to neutral from underperform. But he told clients in a Tuesday research report that Parkinson has many financial issues to address, such as excess industry capacity and stiff competition in the U.S. plasma proteins business. Another problem is rising pension and post-retirement expenses. The key question for investors, he added, is how fast Parkinson can get Baxter to reduce excess inventories and cut more costs. (Weinstein doesn't own shares; his firm has had an investment banking relationship with Baxter in the last 12 months.)

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