The health care sector has taken an extreme beating over the past six months. Rhetoric from the candidates in the run-up to the U.S. election hit drug producers hard, and this pain has spread to the rest of the sector with indiscriminate selling taking place at even some of the more robust producers.
Health care’s extremely defensive nature makes it a great place to invest for investors following all styles, including growth, value and long-term buy and forget. After recent declines, the sector has become attractive to value investors as many providers are now trading at a discount to their historic valuations and look cheap compared to fundamental returns generated.
Abbott Laboratories: A top pick
One such company is Abbott Laboratories (ABT, Financial).
At first glance, Abbott may not appear to be the typical value investment. At the time of writing, its shares were trading at a forward P/E of 16.4 and EV/EBITDA of 14.1. But Abbott’s value is not limited to the company’s valuation. The company’s management is its most valuable part.
Abbott’s CEO is Miles White. He has been at the helm of the 128-year-old Chicago-based health care products and services company for 17 years. He joined Abbott in 1984 in sales and marketing, rising to the top job of CEO in 1999. When it comes to finding a company with a CEO who has risen through the ranks and knows the inner workings of the business, White is hard to beat.
Over the years, White has produced some staggering value for shareholders. In 2012, he presided over the spin off of AbbVie Inc. (ABBV, Financial), a company dedicated to the discovery and distribution of new drugs like Humira and Synthroid.
Before the spinoff of AbbVie, Abbott’s market cap was $84 billion. Today, the combined market caps of Abbott and AbbVie is $175 billion. Another value-creating deal was the sale of Abbott’s generic drug business to Mylan (MYL, Financial) for $5.3 billion in 2015. In 2010, Abbott bought Piramal and Solvay, two Indian drug companies, and today Abbott is the leading pharmaceutical company in India.
The latest acquisition is St. Jude Medical, a worldwide leader in the cardiovascular business. The combined business is expected to generate cost savings of $500 million per year by 2020 and earnings per share of $3 by 2018. If the company hits this target, the shares are currently selling at a reasonable 13 times 2018 earnings.
Management confidence
The above information is all very well and good, but anyone who has been an investor for an extended period will know that a company’s target to increase EPS by a certain percentage by a certain date should be taken with a grain of salt. Abbott’s target to increase EPS to $3 per share by 2018 may ultimately come to nothing; there are plenty of uncertainties ahead that could prevent management from meeting its goal.
Abbott is no ordinary company, however, and it is being led by a CEO who is willing to put his money where his mouth is. In what is probably the largest vote of confidence I have ever seen in a single company by its own management, White has invested a staggering $60 million in Abbott’s shares since mid-July of last year.
To put this buying into some perspective, prior to White’s recent acquisition spree, he owned just under 2 million shares. Today, White holds 3.1 million shares, an increase of more than 50%. It is hard to interpret White’s buying as anything other than an indication that he believes Abbott’s shares are significantly undervalued. With nearly two decades of experience as the head of Abbott, you cannot claim he does not know what he is doing. In fact, if he has owned shares in Abbott the entirety of his career, White may also be the company’s longest-tenured shareholder.
Based on this vote of confidence alone, I would be willing to invest in Abbott. Add in the company's projected growth rate and low forward valuation and Abbott looks extremely attractive.
Disclosure: The author owns shares in Abbott Laboratories.
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