The Japanese yen has been having violent swings of late; we saw it go from a low of 94.29 yen/dollar to a high of 100.59 yen/dollar just in the past month! With this weakening in the yen once again versus the U.S. dollar, what does this really mean to companies such as Abbott Laboratories (NYSE:ABT)? I believe it means bad news for American companies (such as Abbott that) export their products to Japan and depend on that market; the stronger dollar makes their products more expensive. Abbott logged about 22% of its 2012 sales in Japan, equating to roughly $8.6 billion in sales to the land of the rising sun. In addition to a falling yen you have the great Chinese baby formula fiasco of 2013. These issues are pretty critical to the bottom line of the company and with that in mind I want to evaluate on a fundamental, financial, and technical basis if it's worth buying more of the stock right now.
Abbott currently trades at a trailing 12-month P/E ratio of 10.41 (value excludes Abbvie earnings), which is priced inexpensively, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 15.25 is currently fairly priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.25/share. The PEG ratio (0.86), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 5-year horizon), tells me that Abbott is inexpensively priced based on a 5-year EPS growth rate of 12.02%.
On a financial basis the things I look for are the dividend payouts, return on assets, equity and investment. Abbott boasts a dividend of 1.64% with a payout ratio of 38.8% while sporting return on assets, equity, and investment values of 9%, 20.9% and 1.3% respectively; which are all very respectable values. If maybe you feel the market will retract a little more and would like a safety play I don't believe you should hide in Abbott for the dividend yield, but you should hide in it for its long term growth potential.
Looking first at the relative strength index chart [RSI] at the top, I see the stock nearing oversold territory with a value of 35.19 with a downward projection; this tells me that there may be a little bit of downside to the stock. To confirm that, I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is below the red line with the divergence bars flattening out in height, indicating the stock may trade side-to-side shortly before what I believe to be a move up in the stock. As for the stock price itself ($34.25), I'm looking for the 200-day moving average to act as support. If the stock can bounce off the 200-day moving average, I can see it going to $35.74, but if it can't, I see it going down to $32.79 for a risk/reward of -4.26% to 4.35%.
- Jeffries reiterated its "buy" rating on Abbott but lowered its price target to $44 from $46.
- Abbott declared a $0.14/share dividend with an ex-date of 11Jul13 and payable on 15Aug13.
- Abbott is under investigation by China's National Development & Reform Commission for high prices on infant formula and possible violations of antitrust laws. In my opinion this should be a non-issue because in an open market when there is no supply of product from local companies the foreign ones should be allowed to price their milk at whatever cost is reasonable, but sadly I know this won't be the case. We'll have to wait and see what the Chinese government mandates from these companies if the companies themselves don't take any action.
As you can see from the two graphs I included in this article the stock price and the falling yen are strongly correlated; when the yen/dollar ratio goes up then the stock price goes down. When you add the complication about the Chinese formula story you have a more than expected drop in stock price. With these items in mind, I believe Abbott to be valued inexpensively with great double digit growth estimates and room to grow its dividend. On a technical basis I consider the stock to be leveling out around here in oversold territory and see this as a huge buying opportunity. I might be stretching it a bit here when I say that this scenario is similar to the London Whale scenario that embroiled JPMorgan Chase (NYSE:JPM) this time last year, or the U.S. government suing Standard & Poor's (NYSE:MHFI) at the beginning of this year, but those two moments in time proved to be awesome buying opportunities for those two companies making me believe this baby formula fiasco to be an excellent buying opportunity for Abbott. I'm going to put my money where my mouth is and pick some up right here.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are accountable for what you trade and happy investing!