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Abbott: A Brighter Future

August 28, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Abbott Laboratories (ABT), a $64.06 billion market cap company, which is a diversified health care products company that is now focused on nutritionals, diagnostics, generic drugs, and medical devices, following the spinoff of its R&D-based prescription pharmaceuticals business.

Efficiency

The company competes in businesses that have attractive margins, but we must say that it appears to lag rivals when talking about profitability measures.

Abbott plans to continue improving efficiency, working hard in order to build facilities in lower-cost locations such as China and India. We believe the firm can achieve much more improvement.

Management´s action to raise margins in the nutritionals business (500 basis points or more) by the end of the next year should make the numbers look better.

New sources of growth

Abbot focuses on emerging markets to basic products like nutrition supplements and generic drugs. With a favorable position to benefit from stronger demand, emerging markets account for 45% of the company's nutritional sales and is focusing on expansion China and India.

Representing 40% of sales, the company expects that emerging markets will reach 50% of its total sales by 2015. Nutrition segment posted great growth in 2012 fueled by well-known brands such as Similac, PediaSure and Ensure.

Its acquisition of CFR and Veropharm should give the company good revenues in regions like Latin America and Russia for its established pharmaceutical products.

Strategies for expansion

Aggressive cost-cutting plans as well as acquisitions seem to be drivers for growth. Last year, it acquired OptiMedica, an ophthalmic device maker, for $400 million. The acquisition expands its vision care business. Abbott has also completed the acquisition of IDEV Technologies, a privately held company focused on developing next-generation medical devices for use by interventional radiologists, vascular surgeons and interventional cardiologists.

Dividend payment

Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividends. Dividend-payment history affirms its commitment to maximize shareholder wealth. They have been paid since 1926. Its dividend yield is 1.90%, ahead of the industry yield of 1.37%.

Revenues, margins and profitability

Looking at profitability, revenue growth by 1.91% and reported flat earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.3). During the past fiscal year, the firm increased its bottom line by earning $1.50 versus $0.36 in the prior year. This year, the market expects an improvement in earnings ($2.26 versus $1.50).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

ABT

Abbott

10.23

MDT

Medtronic Inc.

15.76

COV

Covidien PLC

18.39

BAX

Baxter International Inc

23.77

 

Industry Median

6.97

The company has a current ROE of 10.23% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Medtronic Inc. (MDT), Covidien PLC (COV) and Baxter International Inc. (BAX) could be the right options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1409198499194.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 27.9x, trading at a discount compared to an average of 44.3x for the industry. To use another metric, its price-to-book ratio of 2.7x indicates a discount versus the industry average of 3.38x while the price-to-sales ratio of 3x is below the industry average of 3.7x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

1409198471192.png

Final comment

Abbott's established pharma business, as well as its strategic acquisition of CFR and Veropharm, situates the company in a strong position to benefit from growing demand in emerging markets. Further, it has already begun efforts to improve productivity and efficiency which we consider a driver for future growth.

The PE relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock. Hedge fund gurus like Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Bill Frels (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, so I would recommend investors to consider this stock for their long-term portfolios.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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