At the start of the year, Abbott Laboratories (ABT) completed its separation with the research based pharmaceutical business into a separate publicly traded company, called AbbVie Inc. (ABBV). The spinoff clearly separated the business into two bodies with different approaches to the future growth. Following the separation, the stock price of Abbott has demonstrated an appreciation of 12.88%. On the other hand, AbbVie stock has had a steep rise, and the stock has gone up by more than 34% since the start of the year.
Since the company's incorporation in 1900, it has expanded its range of business activities. It is currently involved in the discovery, development and production of a variety of healthcare products. The nutrition segment is the largest source of revenues for the company as it contributed to approximately 31% of sales in the first quarter of 2013. The revenues in general are fairly distributed among all business segments, which also include diagnostics, established pharmaceuticals and medical devices. Similarly, after the spinoff, Abbott has also become substantially diversified with respect to regional risk as it only conducts 30% of its operations in the US and 30% in other developed markets. The remaining 40% of its business comes from emerging markets creating a stable geographical distribution of revenues.
Post Spinoff Performance
In the first quarter of 2013, Abbott reported a 1.8% rise in net sales to a total of $5.38 billion, which missed analyst estimates by a slight margin. As compared to the first quarter of 2012, the revenues from the nutrition segment increased by 8.7%. The diagnostics segment also showed an increase of 4.4%, whereas established pharmaceuticals and medical services showed declines of 1.9% and 4.6%, respectively. The company reported earnings of $0.42 per share, showing a 5% increase as compared to the first quarter of the last year. These results reflect a fairly decent performance of the company as it delivered on its budgeted performance. The company has also forecasted annual earnings ranging between $1.98 and$2.04 per share.
What will drive the Future growth?
The approach to expand emphasis on global operations coupled with the manageable levels of debt in the capital structure of the company, direct towards a stable outlook of the company. The long-term growth prospects of the company also appear to be robust. The operating margins of the stronger business segments, nutrition and diagnostics, are expected to expand during the current year. Furthermore, the company has already registered a substantial benefit from its geographical diversification as the growth in emerging markets is driving revenues. In fact, exploring emerging markets seems to be at the forefront of Abbott's growth strategy as Miles White, CEO of Abbott, said in an earnings call that a bad day in the emerging markets still turns out to be better than a good day in developed markets.
What should Investors Expect?
With the prospect of increase in demand, growing revenues are likely to have a positive impact on the stock price. From a fundamental view point, the company is operating at a P/E of 11.03 as compared to the industry average of 29.98. Abbott's P/S of 1.6 is also substantially below the industry average of 4.87. Currently, the company offers a decent dividend yield of 1.6% -- a large increase in capital return is not expected from the company in the short-term. However, Abbott has announced a periodic increase in its dividends. There are better investments available in the market if the motive is to collect dividends. However, the prospect of steady future growth make Abbott an attractive investment.
The company aims to expand its operations and create a global presence by improving its product portfolio and exploring emerging markets. This strategy of the company to pursue long-term profitable growth, coupled with considerable undervaluation and a growing return to investors, makes it an attractive investment for long-term investors. Abbott is a mature company and it is likely to have steady single digit growth. On the other hand, AbbVie is growing rapidly, and it can prove to be a solid short-term investment. AbbVie's stock is likely to move up sharply compared to Abbott's. At the moment, the pharmaceutical sector is looking towards the emerging markets for the future growth, and Abbott's strong presence in these areas will give the company an edge over its peers.