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A substantial recovery perspective has factored into the perception regarding the pharmaceutical industry, essentially due to a step away from the patent cliff and introduction of newer products by the pharmaceutical companies. As these companies begin to report a sizable earnings growth, Moody's has established its outlook for the industry as stable. It has also been stated that the outlook may even be improved to positive if the expected EBITDA growth exceeds 4%. This outlook, however, is highly dependent up on the pricing situation in Europe. Acquisitions are also expected to take full swing as some of the companies have deleveraged their capital positions after large transactions and are now set to pursue further growth.

Stock Performance

Abbott Laboratories (NYSE:ABT) is among the prominent players in the industry with a market capitalization of $59.2 billion and total revenues of $39.97 billion in FY12.

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Source: Bloomberg

The above chart shows the stock price of Abbott and its close competitors, Medtronic Inc. (NYSE:MDT) and Stryker Corporation (NYSE:SYK) in the past three years. The chart clearly reflects upon the outperformance of Abbott against its competitors.

Growth Strategy:

The improvement in the stock price has occurred because the company pursues an aggressive growth strategy with more than 30 medical devices and 150 product launches scheduled for FY13. Also, 40% of the company's sales come from emerging markets. In FY12, the company announced its aim to improve the emerging markets sales proportion to 50% by FY15. At the same time, unlike its former subpart Abbvie Inc. (NYSE:ABBV), the company has not taken up unsustainable proportions of financial risk to support its growth strategy.

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Data Source: Morningstar

The above chart shows the research and development costs incurred by the company in the last six years. We see that a substantial improvement has occurred in the focus on research and development as indicated by the trend line. The emphasis on this growth aspect has proved to be prolific for the company has these costs have clearly contributed to the revenue and asset growth of the company. The revenues of the company have reported a CAGR of 7.8% and the total assets have shown a CAGR of 12.2% since FY08.

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Source: Annual Report FY12

The table above provides a detailed business segment analysis. Proprietary pharmaceuticals are the largest contributor to the company's revenues and total assets. Amongst the smaller sections of the company's business operations, the growth appears to be triggered from the nutritionals segment as the net sales in the past three years have increased by 16.97% and total assets increased by 10.45%. The operating earnings of this segment also reported a 31.1% rise as compared to FY10. Moving forward, analysts believe that the nutritionals segment will serve as the key growth driver due to expansion in the product's market.

Financial Stability

Abbott Laboratories' consistent profitable performance has been supported by impeccable financial stability as the company has maintained its liquid assets and limited the financial risk to a manageable degree.

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Source: Abbott Laboratories

The above chart shows some key ratios which measure the financial risks of the company since the beginning of FY10. The debt to equity ratio has been restrained showing that the company is careful when it comes to leveraging in order to support the company's growth. At the same time, the current ratio of the company and the free cash flows to firm have demonstrated a substantial improvement over this period as the company's profitable operations continue to contribute to strengthen its liquidity position.

Comparative Analysis

In order to address the investor's viewpoint in this situation, a comparative analysis has been conducted using important valuation metrics and investor consideration indicators. This will reflect upon the potential of the company in a forward looking aspect.

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Data Source: Morningstar

The above table shows key valuation metrics of Abbott Laboratories and two of its competitors, Medtronic and Stryker Corp. along with the industry averages. The analysis clearly shows that Abbott Laboratories growth aspects have not been priced by the market as the company remains undervalued against its competitors and the industry average in terms of all valuation statistics. Furthermore, the company's dividend yield of 3.4% is unmatched across its competitors and the industry which shows the high degree of emphasis on addressing investor's return.

Conclusion

The pharmaceutical industry is on its way towards recovery. Increasing demand from emerging markets is likely to support this recovery due to economic progress. Technological innovations and new products will also further the growth in the market. The prolific growth strategy of the company, coupled with the efficient management of financial resources will extend the upswing of the company's stock price. This will further be supported by the substantial undervaluation of the company and the stock will prove to be a profitable venture of equity investors. Taking these factors into consideration, a buy recommendation is proposed as Abbott Laboratories prepare to experience aggressive growth in the coming future.

Source: Abbott Laboratories: Undervalued Potential