Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Here’s Why Baxter International Fell 12.3% in October

By Brian Orelli, PhD - Nov 7, 2019 at 2:29PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Accounting issues overshadowed third-quarter results.

What happened

Shares of Baxter International ( BAX 1.91% ) fell 12.3% after the company released preliminary third-quarter results in which Baxter said it had started an internal investigation into foreign exchange gains and losses that the company had booked in the past.

So what

The third-quarter numbers weren't too bad. Revenue was up 3% to $2.85 billion, just a hair under the consensus for Wall Street analysts' estimates of $2.86 billion. Improving operating margins helped adjusted operating income increase by 10% year over year to $555 million.

The foreign exchange issues are a bigger problem, mostly because it isn't clear how far the issue might extend.

As an international company, Baxter conducts intracompany transactions that require foreign exchange conversions, and the company used an exchange rate convention that was not in accordance with generally accepted accounting principles (GAAP). That boosted the "other (income) expense, net" line on the earnings report by $294 million over five and a half years.

The good news is that the extra boost is nonoperating income, so operating income -- how Baxter is performing -- should still be accurate. But Baxter is still investigating, and it might need to make other adjustments.

Balance sheet with pen and magnifying glass.

Image source: Getty Images.

Now what

This accounting issue may turn out to be a minor issue for the company. Investors should have largely been valuing the company on revenue growth and operating margins that ultimately result in operating income. It's not very easy to predict the catchall "other (income) expense, net" line, so most investors largely ignore the variability from quarter to quarter.

Still, when investing in a large healthcare company like Baxter, investors are often looking for a lower-risk proposition than they'd get with a more volatile biotech. Accounting investigations, even if they're minor, introduce undue risk, so last month's decline is certainly understandable.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baxter International Inc. Stock Quote
Baxter International Inc.
BAX
$76.51 (1.91%) $1.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
634%
 
S&P 500 Returns
141%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/02/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.