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Love Serenades and New Flings

March 29, 2007 | About:
Vitaliy Katsenelson

Vitaliy Katsenelson

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I sang love serenades for Abbott Labs’ (ABT) stock for a long time. Call me materialistic, but my love for stocks is not ‘til death do us part,’ it is conditional of fundamentals staying intact and of valuation - it has to be undervalued. Abbott Labs’ fundamentals have improved over the last couple of years - it sold its medical device unit to General Electric (GE) at a great premium and it “stole” a stent business from Guidant playing on Boston Scientific’s (BSX) urgent need to close the deal. Abbott’s management have proven the company to be a very shrewd operator. However, Abbott did what any good stock will do at some point (hopefully) – it appreciated and became fully valued. Though I still love the company, I had to say goodbye to Abbott’s stock. Hopefully, I’ll be able to buy it in the future on my terms, at a lower price.

I found a new ‘fling’ - Glaxo Smithkline (GSK) – Abbott’s worthy replacement. GSK reminds me of Abbot’s stock about two years ago: decent (very similar to ABT) growth prospects ahead (earnings growth of about 7-8% a year) further helped by a growing industry, a strong balance sheet, great return on capital of close to 40%, fat 20% plus profit margins, and a competitive moat around its business that rivals the size of Lake Michigan. All that coupled with great valuation of about 14x earnings and 3.3% dividend yield. On top of all that it comes with an added bonus, its dividend is paid in pounds and converted to dollars – if the dollar decline continues (my expectation), its earnings and dividends will rise in US dollars.

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Vitaliy Katsenelson
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