Following several years of steady growth, Abbott Laboratories (ABT, Financial) reported disappointing results for the third quarter of 2022, causing investors to worry that further declines could be in store for the stock. Medical device sales were down sharply, adding to already-negative investor sentiment from an infant formula recall and production halt earlier this year due to an FDA inspection that found Cronobacter sakazakii bacteria, which can be deadly to infants, in several areas of the company’s Sturgis, Michigan facility.
However, it seems like chances are high that Abbott’s woes will turn out to be short-lived. The company claims that much of its troubles are due to Covid-19 lockdowns in China and other temporary factors such as the infant formula recall. Despite recent volatility, the company’s top- and bottom-line growth in recent years has been nothing short of spectacular.
On Friday, the American medical device company once again reaffirmed its expectations for long-term growth by announcing that it would raise its dividend by 8.5% to 51 cents per share. The company’s dividend growth streak now stands at 51 years, making it one of the few Dividend Kings on the market.
Growth interruptions are unlikely to last
Third-quarter results showed that Abbott’s international medical device sales dropped by 9% year-over-year and were down 7% compared to the previous quarter. However, the company said this was due to a combination of supply chain issues and China lockdowns, both of which are temporary issues.
Helping to support this claim is the fact that U.S. medical device sales rose 11% year-over-year. With both U.S. and international sales combined, medical device sales were only down 0.5% compared to the prior-year quarter. Growth was particularly strong for structural heart and diabetes care medical devices.
When taking all four main business segments into account (nutrition, diagnostics, established pharmaceuticals and medical devices), sales for the quarter came in at $10.4 billion, down 4.7% year-over-year on a reported bases and 1.3% on an organic basis (excluding negative foreign exchange impact from the strong dollar).
Diagnostics in the U.S. were down 10% as this segment was negatively impacted by lower Covid-19 testing-related sales. International diagnostics were only down 1.8%, though we can likely expect international demand for Covid-19 testing to decline as well.
Established pharmaceuticals was the only segment that reported year-over-year growth for the third quarter, with sales rising 4.9%. This segment, which operates exclusively in non-U.S. markets with a focus on emerging markets, sells tried and true pharmacy staples to underserved populations.
The nutrition segment’s sales were down sharply in the U.S. and were mostly flat internationally, which was due to a manufacturing stoppage of certain infant formula products at Abbott's Sturgis, Michigan facility in February due to FDA concerns about unsanitary conditions. To make matters worse, right after the factory managed to re-open, it had to be closed again due to severe flooding. Abbott resumed production at the facility again during the third quarter. The factory stoppage and recalls slashed pediatric nutrition sales by 31% in the U.S.
Some issues could still persist
While some factors such as the Covid lockdowns in China and the infant formula production halt should soon (hopefully) be in the rearview mirror, other issues could persist for a while yet.
For example, Covid-19-related diagnostic sales still have further left to fall, especially on the international front. Not only have more people already gotten Covid or been vaccinated by now, far fewer employers, businesses and big events are requiring people to get tested for Covid before going to work, travelling or attending large-scale gatherings.
Supply chain constraints could also prove persistent as well. Global political unrest, raw materials shortages and high fuel costs continue hampering the production and distribution of certain products for many companies. In Abbott’s case, supply chain issues are hurting its FreeStyle Libre sales in international markets and continue negatively impacting the production of certain electrophysiology products. It’s difficult to tell for certain whether these issues will continue going forward, but it seems like a possibility that shouldn’t be ignored.
Valuation and dividend analysis
Despite recent issues that should turn out to be temporary for the most part, Abbott has a three-year revenue per share growth rate of 11.7% and a three-year earnings per share without non-recurring items growth rate of 44.3%.
The stock’s price-earnings ratio of 24.27 is below the company’s historical median of 31.77, and the PEG ratio of 1.11% indicates fair valuation when Ebitda growth is taken into consideration. The GF Value chart rates Abbott’s shares as modestly undervalued based on a combination of past growth, historical valuation multiples and analysts’ estimates of future results.
The company’s latest dividend raise is an encouraging sign and continues the company’s long history of commitment to growing shareholder returns. Unfortunately, the trailing 12-month dividend yield of 1.76% isn’t a strong point to build off of, and the yield by itself likely won’t entice investors. However, continuing to raise the dividend in the high single-digits is still a step in the right direction that shows the company likely isn’t expecting results to fall off a cliff any time soon.
Abbott also raised its full-year GAAP earnings per share guidance in its third-quarter earnings report. It now expects 2022 earnings per share to come in at a range of $3.75 to $3.81. While this is lower than the earnings per share of $3.94 it reported in full fiscal 2021, it’s not bad considering all of the setbacks the company has faced this year.
Takeaway
Abbott Laboratories is a classic case of a series of unfortunate events tanking the share price, even though the majority of its issues will be short-lived. The company has issued solid guidance, is working to resolve its issues and continues to raise its dividend. While the stock might not fully recover in the near-term, recovery from recent headwinds in the upcoming quarters could potentially create bullish investor sentiment in an environment when many companies are likely to report disappointing earnings.
