(FORTUNE Magazine) – Glenn Reicin of Morgan Stanley has been a tough critic of Baxter Inter-national (BAX, $31) over the past two years, charging that executives at the medical products company used the balance sheet to meet overly optimistic earnings targets. But he turned bullish after CEO Harry Kraemer resigned earlier this year following months of disappointing earnings and a plum-meting share price. In late June, Reicin upgraded Baxter to outperform with shares trading at $33. A month later Baxter announced disappointing earnings and lowered its guidance. We called Reicin to see if he was standing by his pick. --David Stires

You liked the stock at $33. Do you still like it at $31?

I'm not changing anything in my recommendation. I'm a little bit surprised by the market's reaction but not surprised by the event. We're in the early stages of restructuring. Clearly, everything on the balance sheet improved in the quarter. The integrity of the numbers is clearly improving, and that's been our thesis.

Why did you upgrade last month?

Three reasons. There was a change in management, and I felt the individuals appointed were particularly well qualified. Bob Parkinson, the new CEO, used to be president of Abbott Laboratories, and he's an excellent operations guy. Second, we are noticing an improvement in the plasma market, which is a large area for them. The third reason is that the restructuring they have announced should provide them with enough cost savings to change some of the aggressive accounting.

What was your beef with Baxter's accounting?

The plasma business is sort of like oil refining: You produce some good stuff, and you produce a lot of bad stuff. You can grow the business by selling the good stuff and avoid charging off the bad stuff if you're willing to let it build up in inventory. That's essentially what was happening. So earnings were growing, but the balance sheet was deteriorating, which set off a whole series of questions concerning the quality of earnings.

Was Baxter doing anything illegal?

No, we just felt the accounting assumptions they used were liberal.

The SEC opened an investigation into Baxter's financial forecasting last year. Does that concern you?

It concerns me, but the previous management is responsible for it.

Were you happy when the CEO quit?

I'm not going to go there. It takes away the focus on the important thing, which is the investor.

So the stock is undervalued?

The stock is selling at a market multiple, but it has an above-average yield. And we think Baxter's bottom-line growth will outstrip the market's for the foreseeable future.

What's going to drive the stock higher?

Improving the quality of earnings and slowly addressing the accounting and earnings issues that have been plaguing the company for the past two years.