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Abbott Laboratories: Momentum Has Returned

The company's core business continues to perform well

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Nov 18, 2021
Summary
  • Abbott Laboratories' most recent quarter easily topped analysts' estimates.
  • Covid-19 related revenue accelerated on a sequential basis, but the core business had strong growth as well.
  • Despite positives, shares trade just slightly ahead of intrinsic value, suggesting that this near-Dividend King is fairly valued.
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After Abbott Laboratories (

ABT, Financial) reported its second-quarter earnings results late last July, the stock fell as leadership had lowered its guidance. The stock had been on the upswing as it looked like the company was going to produce its best year ever, so the downward revised guidance spooked investors.

The most recent earnings release saw leadership return to its previous bullish guidance, and the stock now sits above where it was before the summer earnings report. Let’s dig deeper into why I think the momentum for Abbott Laboratories could continue even as the stock trades near its highest price over the last year.

A rundown of earnings

Abbott Laboratories reported third-quarter earnings results on Oct. 22. Revenue was higher by 23.4% year-over-year to $10.9 billion, beating Wall Street analysts’ estimates by $1.36 billion. Adjusted earnings per share of $1.40 was a 42 cent, or 43%, increase from the prior year as well as 45 cents ahead of what analysts had anticipated.

On an organic growth basis, sales were up 22.4% from the prior year, with all segments of the company posting at least high single-digit growth.

Diagnostics was the top performer as revenue of $3.9 billion included organic sales growth of 46.8%. Rapid Diagnostics was the real stand out, as revenue was up 143%, driven by Covid-19 related sales of $1.9 billion. Excluding Covid-19, this segment had a 14.1% increase in sales, with organic growth of 12.5%.

Medical Devices improved 13.1% to $3.6 billion as this segment had gains in just about every category. Leading the way was Diabetes Care, up 30.6%, and Heart Failure, up 19.5%. This segment continues to benefit from the recovery from the pandemic as more elective procedures have been performed.

Revenue for Nutrition of $2.1 billion represented a nearly 9% increase on an organic basis as pediatric and adult businesses were both higher by a high single-digit amount. Ensure and Glucerna, a leading diabetes nutrition brand, were the standouts during the quarter.

Established Pharmaceuticals was up more than 15% to $1.3 billion. Key Emerging Markets, which includes foreign markets such as China, India and Russia and contributes almost three-quarters of revenue, had organic growth of 18%.

Abbott Laboratories offered revised guidance for 2021. The company now expects adjusted earnings per share of $5.00 to $5.10 for the year, up from the prior guidance of $4.30 to $4.50. This is also in line with the company’s guidance of at least $5.00 of adjusted earnings per share prior to the second quarter.

Takeaways

Covid-19 was a contributor to results, as the related sales totals was a $600 million improvement on a sequential basis. Even as a higher percentage of the population, both domestic and international, have received a vaccine, Covid-19 testing still remains in high demand.

This helps to dispel the thought that the vaccines might hamper those companies seeing a pickup in business due to the pandemic. But these results show that healthcare companies in general, and Abbott Laboratories in particular, might see less of a severe decline in their Covid-19 related business results.

While the pandemic has aided the company, Abbott Laboratories is far from just a Covid-19 story. Covid-19 related revenue was $881 million in the third quarter of 2020. Accounting for this, Abbott Laboratories’ revenue grew more than 13% compared to the prior year, demonstrating the strength of the company’s other businesses.

Businesses without much of a connection to Covid-19 also trhived. For example, Diabetes Care growth was driven by Abbott Laboratories’ FreeStyle Libre and Libre Sense devices. These products had sales of $968 million in the quarter, which was a 38.8% improvement from the prior year. These two products also represented 9% of total sales for the company, showing that they remain integral to the company’s overall success.

The most recent quarter is also coming off some solid comparable figures in the prior year. For the third quarter of 2020, revenue was up almost 10% and adjusted earnings per share was higher by 17% from the comparable period of 2019. Organic revenue growth was 10.6% for that quarter.

Organic growth for Diagnostics, Nutrition and Medical Devices was 38.8%, 4.1% and 2.6%, respectively, for the third quarter of last year. Established Pharmaceuticals was down 3.3%. As a reminder, all but Nutrition had at least a 13% improvement in the most recent quarter.

Looking at these figures, Abbott Laboratories doesn’t appear to be simply relying on its Covid-19 related sales to grow. This looks like pretty convincing evidence that the company will continue to produce high rates of growth even as the pandemic is further in the rear-view mirror.

Valuatoin

Abbott Laboratories has an average price-earnings ratio of just over 21 since spinning off AbbVie Inc (ABBV) in 2013, so the stock has often enjoyed a premium multiple.

However, shares of the company are far from cheap. Using Tuesday’s closing price of $128.62, the stock trades with a forward price-earnings ratio of 25.9 based off of revised guidance for the year.

Still, the stock looks more fairly valued when considering its GuruFocus Value chart:

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Abbott Laboratories has a GF Value of $119.69, resulting in a price-to-GF-Value ratio of 1.09. Shares would need to retreat less than 7% to trade with its GF Value. By this measure, the stock is overvalued, but not terribly so. Shares earn a rating of fairly valued from GuruFocus.

Final thoughts

Abbott Laboratories delivered an estimate-beating quarter by a wide margin for both revenue and earnings. The Covid-19 contribution was higher on a sequential basis, but, more importantly, the core business also experienced an acceleration of growth. The company also raised its guidance to where it was before the second quarter of the year.

Investors should take this as a good sign for when the pandemic isn’t as much of a factor in the company’s business. The company also has nearly five decades of dividend growth and has paid a continuous dividend 391 consecutive quarters.

The stock isn’t a bargain, but the most recent quarterly result could mean that momentum has returned for the company. I thus think Abbott Laboratories might have more room to the upside even as it trades near its 52-week high.

Disclosures

I am/we are Long ABT
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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