Shareholders in Abbott Laboratories (ABT) are awaiting an eventful week. On Monday, the company announced two deals to further expand its operations.
On Wednesday, investors will get a chance to see how the company has performed in the second quarter. Irrelevant of the outcome of the second quarter results, and the nice additions which the firm has made, shares offer little appeal on the back of premium valuation multiples.
As such, I refrain from making an investment. This does not automatically translate into a short thesis as I don't see a catalyst for a correction at the moment.
Abbott announced that it has reached an agreement to acquire IDEV Technologies. Abbott will pay $310 million net of cash and debt for the privately held company. IDEV focuses on the development of next-generation medical devices used by radiologists, vascular surgeons and cardiologists.
The company's products include SUPERA Veritas which treats blockages in blood vessels due to peripheral artery diseases. Veritas is cleared for treatment related to cancer and is currently being reviewed by the Food and Drug Administration (FDA). The treatment is currently not approved in the US but has been studied on more than 1,500 patients.
The deal is expected to close by the end of the year, and will not materially impact 2013's earnings.
Abbott announced that it has reached another agreement to acquire OptiMedica Corporation. Abbott will pay $250 million net of cash, plus additional payments of up to $150 million. Contingency payments are dependent upon achievement of certain milestones for the privately held company.
With the acquisition, Abbott will expand its vision care business in the femtosecond laster-assisted cataract surgery market. OptiMedica's Precision Laser System allow surgeons to replace manual steps during cataract surgery with a precise, computer-guided laser technology. The system has obtained the CE mark in Europe and has been cleared by the Food and Drug Administration.
Some 22 million cataract surgeries will be performed in 2013 and the aging world population will boost demand going forwards.
Again, the deal will be expected to close by the end of the year. The deal will not materially impact the 2013's full year earnings per share guidance.
Abbott Laboratories ended its first quarter with $8.52 billion in cash, equivalents and short term investments. The company operates with a total of $7.10 billion in total debt, for a net cash position of around $1.42 billion. All in all, Abbott has sufficient liquidity to finance the deals.
For the first quarter of 2013, Abbott generated revenues of $5.38 billion which is up 1.8% on the year. Earnings from continuing operations advanced by 4.6% towards $674 million. The company is predicting normalized earnings per share of $1.39-$1.45 for the full year, implying that earnings come in around $2.2 billion. Full year revenues could come in around $22 billion.
Trading around $35 per share, the market values Abbott around $55 billion, or its operating assets just below $54 billion. As such, operating assets are valued around 2.5 times annual revenues and 25 times annual earnings.
Abbott pays a quarterly dividend of $0.14 for an annual dividend yield of 1.6%.
Some Historical Perspective
Abbott Laboratories has split itself up on January the 1th of 2013. The biopharmaceutical division which is best known from its Humira drug, which treats rheumatoid arthritis, got split up as AbbVie (ABBV). Abbott itself is now completely focused on medical devices, nutritional products and diagnostics, among others.
Shares of the company trade with year to date gains of 8% after reaching highs of $38 in May of the year. Shares have fallen a bit, currently trading around the $35-$36 mark.
It is quite an eventful week for shareholders in Abbott as the company does not only report the news of the two acquisitions. The firm is due to report its second quarter earnings on Wednesday as well.
The company guided for earnings from continuing operations of $0.27-$0.29 per share. Including $0.16 per share in special items, Abbott could report earnings of between $0.43 and $0.45 per share.
OptiMedica which will be bought for up to $400 million is a competitor of Bausch & Lomb, which has been bought by Valeant Pharmaceuticals (VRX) earlier this year. Abbott already sells lenses involved for cataract surgery and care.
John Capek, which leads Abbott's medical division, said the laser products could generate annual revenues of several hundred million dollars in five years time. The usage of laster procedures could increase from a current 20% of cataract surgeries, towards 70% in three or four years times.
The $310 million addition of IDEV, which is known from its Supera Veritas stent system, seems nice as well. The product treats blockages of blood vessels due to artery disease. The product could generate annual revenues of a few hundred million in a dollars as well in a couple of year's time.
The reported price tag of $560 million for the company's combined represents just 1% of Abbott's market capitalization. The valuation seems fair given that Abbott expects to see rapid revenue growth in the year's coming forward. The company furthermore gets the hand on two interesting products and technologies.
Both eye care and peripheral artery are growth markets with an aging and increasingly obese societies in Europe and the U.S.
Overall the additions seem very fair, but investors will be looking forward to Wednesday's earnings. Shares trade at premium valuations, at 2.5 times annual revenues and 25 times annual earnings. These are premium valuations, supported by solid growth rates, a history of increased dividends and a solid balance sheet.
At these levels shares are fairly highly valued, a bit too high to my taste. I refrain from making an investment in the company on the back of the outlined valuation motives. I am hesitant to short the stock as well. While the valuation is high, it is not excessive. I don't see an immediate catalyst for a short thesis as well.