Abbott Laboratories: A Long-Term Play

| About: Abbott Laboratories (ABT)

Abbott Laboratories (NYSE:ABT), a pharmaceutical and medical devices giant, has reported its fourth quarter and full year 2013 earnings. Unlike its peer Johnson & Johnson, Abbott did not post very impressive results missing analysts' estimates for its top-line growth. However, an expansion in the adjusted operating margin enabled the company to match the average analysts' forecasts regarding the per share earnings.

Operational and Reported Sales Growth

Abbott generated global sales of $5.655 billion during the fourth quarter of 2013 and missed Wall Street's expectation of $5.72 billion. The YoY growth in total sales was only 0.4% on a reported basis. The company's sales were primarily hurt by the considerable negative impact of foreign currency exchange and continued fallout from a product recall that has damaged the company's baby-formula products in Asia.

This sales disruption in pediatric nutrition products is estimated to have reduced sales growth in the international pediatric nutrition segment's sales by approximately $94 million during the fourth quarter. These lower sales were offset by the worldwide increase of 5% in the adult nutrition segment. The international adult nutrition segment's sales grew by 14%. Abbot's total sales in the nutrition segment increased by 1.1% on an operational basis and decreased 0.8% on a reported basis.

Besides the aforementioned declines, a weakened European economy pressured sales of Abbott's generic drugs and resulted in a very slow growth in the Established Pharmaceutical division. Much of the company's pharmaceutical sales declined due to the spin-off of its branded specialty drug unit in January 2013. However, the segment's revenues were somewhat supported by the higher sales in key emerging markets. The total sales in the Established Pharmaceuticals division increased by 0.7% on an operational basis and decreased by 4.3% on a reported basis compared to the results of the fourth quarter of 2012.

Abbott's other two divisions, diagnostics and medical devices, have shown healthy growth on both an operational and reported basis. The diagnostics division jumped by 8.8% on an operational basis and by 5.9% on a reported basis on the back of significant growth in the core laboratory diagnostics and point of care diagnostics divisions. The segment experienced continued above market growth in both the developed and the emerging markets.

The revenues in the medical devices division were primarily supported by the higher sales in the medical optics and endovascular segments. The vascular and vascular product lines also supported the division's revenues. This growth was partially offset by a slump in the diabetes care and other coronary product segments' sales. The overall growth in this segment was 4.1% on an operational basis and 2% on a reported basis.

In full year 2013, Abbott's sales increased by 3.70% on an operational basis and 1.60% on a reported basis. The full year sales were also impacted by the stronger dollar and overseas sales disruption earlier in the year in sales of its baby formulae. The main driver of the company's full year sales growth were the nutrition and diagnostics division whereas the established and medical devices division reported sales decreased in comparison to 2012's sales.

Earnings Growth

During the fourth quarter of 2013, Abbott managed to significantly cut its selling, general, and administrative expenses and also reduced its research and development expenses compared to results of 4Q2012 through its cost-cutting initiatives. The reduction in expenses improved the company's year-over-year operating margin by 4.4%. The company's year-over-year operating income jumped by 48.8% and reached $757 million in 4Q13 compared to $509 million in 4Q12.

The company's interest expense also considerably declined in this quarter as a result of a change in Abbott's capital structure after AbbVie's (ABV) spinoff. This expense dropped slightly more than 76% YoY. These factors along with a 0.4% growth in sales drove the company's after-taxes earnings from continuing operations to $589 million compared to a loss of $522 million in the fourth quarter of 2012 reflecting an increase of almost 13%.

There were no earnings from the company's discontinued operations this time to compare to the earnings of $1,575 million in 4Q12 so the company's YoY net earnings declined by 44%.

The diluted earnings per common share this quarter were $0.37 per share down by 43.9% but the diluted earnings per share from continued operations jumped 20.8% reaching $0.58 per share versus $0.48 per share in 4Q12.

Like the results of the fourth quarter, Abbott reduced its SG&A and research and development expenses in full year 2013 and this improved the company's operating margin by 1.9%. The improved margin along with lower interest expense and a 1.6% growth in sales enhanced the company's full year after-tax earnings from continued operations by approximately 312% compared to 2012.

But again, due to a much lower income from discontinued operations in 2013 the company's net earnings declined 15.3% year-over-year. Full year diluted per share earnings were $1.62 compared to $3.72 per share last year.

Cash Returns to Shareholders

In October 2013, Abbott's Board of Directors decided to raise the company's quarterly dividends by 57% to $0.22 per share. This dividend is payable on February 15, 2014. The company is a member of the S&P 500's Dividend Aristocrats Index that tracks companies that have increased their annual dividend for 25 consecutive years.

In 2014, Abbott intends to grow its share repurchase program to more than $2 billion.

Anticipation of Future Sales

It is expected that Abbott's sales in coming years will grow at a good rate on the back of favorable global demographics and healthcare trends. The growing aging population worldwide would enhance the sales growth in the adult nutrition segment and support the growth in the other three divisions as well.

Besides that, Abbott's increased product launches, strong investment in research and development and expanding footholds in emerging markets through next generation products will increase the company's worldwide market share and help it to add considerable growth to the top line. The launch of iDesignDx system, the acquisition of Optimedica and the launch of MitraClip will boost the revenues of the medical optics segment and the diagnostics division that are already performing remarkably.

This growth would offset the effect of declining sales growth in the Established Pharmaceuticals division. The growth in this division is expected to remain suppressed due to increased competition in the demand for generic pharmaceuticals.

Sustainability of Margins

Abbott's management intends to continue its cost-cutting initiatives in the future and improve its margins as it did successfully in 2013. For the nutrition and diagnostic divisions the company intends to maintain an operating margin of more than 20% until 2015 through product and market rationalization, supply chain management, integrating manufacturing processes and cutting costs in product materials and packaging.

For the Established Pharmaceutical division the company intends to achieve an operating margin of approximately 25% through optimization of global sourcing, its manufacturing network, and supply chain. Management also intends to implement operational efficiencies to offset pricing pressures in this division primarily in the developed markets.

Final Thoughts

The first feeling that comes to mind after looking at Abbott's results is the feeling of disappointment as the company's net earnings have declined 44% and the top line showed a growth of only 0.4%. However, in order to properly analyze the company's results the negative impacts of non-recurring items and events should be excluded. After analyzing the adjusted results, the company's performance during the fourth quarter and full year 2013 seems quite satisfactory. Despite lower earnings, due to lower discontinued operations income, Abbott continued its habit of increasing annual dividends every year.

The performance is projected to be continued in 2014 based on the increased demand of the company's products and its cost-cutting initiatives that would eventually enhance the net earnings and shareholders' profits.

Since the company has offered handsome profits to the investors in the past and intends to increase the profits in 2014 through cash dividends and share buybacks I would recommend buying the company's stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.