Shares of Abbott Laboratories (ABT) jumped up on Wednesday after the company reported its third-quarter results. While non-GAAP earnings quite comfortably beat consensus estimates, it was the aggressive dividend hike, which received applause from investors.
I do suspect that shares might see some momentum in the coming weeks or months on the back of the solid results and the dividend hike. Yet I remain on the sidelines as I don't see convincing upside from these current levels.
Abbott Laboratories generated third-quarter revenues of $5.37 billion, up 2.0% on the year before, but slightly missing consensus estimates at $5.39 billion.
GAAP net earnings halved to $966 million. That being said, last year's earnings included earnings from discontinued operations of $1.60 billion. Net earnings from continuing operations rose by 128% to $773 million.
Abbott reported adjusted earnings of $0.55 per share. Analysts were looking for non-GAAP earnings of $0.51 per share.
GAAP earnings from continuing operations rose from $0.21 per share last year to $0.49 per share over the past quarter. Note that last year's earnings were negatively impacted by cost reduction programs. CEO and Chairman Miles D. White commented on the third quarter results:
We continued to have strong earnings performance, in spite of a supplier recall that impacted our International Nutrition business. Today we also are announcing a significant increase in our quarterly dividend.
Looking Into The Results...
As noted above, Abbott reported a 2.0% increase in total revenues. In local currencies, sales were up by 4.3% as adverse currency movements shaved off 230 basis points in revenue growth.
Despite the revenue growth, the absolute costs of goods sold fell in dollar terms. Consequently, gross margins rose some 160 basis points to 54.4% of total revenues. Abbott also showed very tight cost control in selling, general and administrative expenses, which fell some 415 basis points to 32.3% of total revenues.
As a result, operating earnings more than doubled to $630 million, representing 11.7% of total revenues.
Looking Into The Divisions...
The nutrition business reported a 1.9% increase in revenues towards $1.63 billion. In constant currencies, revenues would have been up by 3.4% driven by a solid performance of pediatric and adult nutrition sales. A sales disruption through a supplier recall impacted sales by a sizable $90 million over the quarter and will hurt sales in the coming quarters as well.
Diagnostics sales rose by 8.0% to $1.12 billion as they rose by 10.5% in local currencies. Sales rose across the board with revenue growth in the mid-double digits in the smaller molecular and point of care business.
Established pharmaceuticals revenues were down by 2.9% to $1.23 billion, which is entirely explained by adverse currency movements. In local currencies revenues were up by 0.6%, driven by a solid performance of the emerging markets.
Medical devices saw a revenue increase of 1.9% to $1.34 billion, including 2.0% currency headwinds. Notably the medical optics market performed really well.
Unfortunately Abbott Laboratories did not provide a balance sheet for the third quarter yet. The company ended its second quarter with $9.39 billion in cash, equivalents and short-term investments. Total debt stood at $7.93 billion, for a net cash position of almost $1.5 billion.
Revenues for the first three months of the year came in at $16.2 billion up 2.1% on the year before. The company reported GAAP earnings of $1.99 billion, down 59.5% on the year before. Note that non-GAAP earnings actually rose by 13.6%.
At this pace, annual revenues should come in around $22 billion, while the company guides for ongoing earnings of around $2 per share, and GAAP earnings of around $1.50 per share, or around $2.3 billion.
Factoring in gains of over 6% on Wednesday, with shares exchanging hands at $36.00 per share, the market values Abbott at $56 billion, or its operating assets around $55 billion.
This values the company at 2.5 times annual revenues and roughly 23-24 times annual GAAP earnings.
Abbott increased its quarterly dividend by some 57% to $0.22 per share, for an annual dividend yield of 2.4%.
Some Historical Perspective
At the start of the year, and after quite some preparations, Abbott was finally split up. Former Abbott Laboratories consisted of Abbott and AbbVie (ABBV). Abbott is now focused on diagnostics, medical devices and nutritionals, among others, while AbbVie is a pure pharmaceutical company.
Since the start of the year, when the companies have been separated from each other, AbbVie has been the clear winner. Its shares have seen year-to-date returns of around 37%, while shares of Abbott are trading with gains of 10%.
Obviously, the big news in the earnings release is the big 57% dividend hike, boosting the dividend yield to a more appealing 2.4% at the moment. Note that investors will only receive this higher dividend halfway during February. Both the decision to raise the dividend, and the size of the hike, came as a surprise, which positively surprised the market.
Based on the solid non-GAAP results, Abbott is sticking to its full-year earnings target of $1.98 to $2.04 per share, suggesting shares trade around 17-18 times earnings.
This seems a bit rich given the 2% reported headline growth but note that Abbot has had some setbacks, including currency headwinds, which shaved off over 2% in revenues, and the recall of milk formula brands in China. This recall hurt sales of nutritional products by $90 million in the quarter. So excluding these items, revenues would have risen by 6% while Abbott has a long history of showing solid revenue growth.
While the recall will still affect operations in the coming quarters, the effect of the recall and adverse currency movements will continue to diminish in the coming quarters. Looking through these short-term headwinds, Abbott was actually performing reasonably well, especially in its diagnostics business.
Back in July, when Abbott announced the acquisition of IDEV Technologies, I last took a look at the company's prospects. At the time, Abbott furthermore announced the acquisition OptiMedica for a combined value of up to $560 million.
I concluded that shares were fairly valued, or even a bit expensive according to my taste. Ever since, the company has taken some measures to improve cash flows to shareholders. The company announced a $3 billion share repurchase program in June and now announced a dividend hike, which boosted the dividend yield to 2.4%.
If Abbott executes its repurchase plan within two years, the repurchases could represent another payout of roughly 3% per annum to shareholders, for combined payouts of some 5.5%. This seems quite attractive given that Abbott's core markets continue to grow at a healthy 5-7%, driven by solid emerging market presence.
Trading around $36 per share I see the possibility for shares to re-test year-to-date highs of around $38. That being said I don't see shares going much higher than those levels, or possibly $40 per share in the remainder of this year.