Abbott Labs (NYSE:ABT) is scheduled to release its Q1 2014 earnings on Wednesday, April 16. In the previous quarter, operational sales increased 3.3% year-over-year (y-o-y) to $5.7 billion, driven by robust sales of its Diagnostics, Vascular and Medical Optics products. Nutritionals, the company's largest business segment, continued to be impacted by the supplier recall that was initiated in international markets in August of last year and reported a marginal 1.1% y-o-y increase in operational sales. On the cost side, the healthcare conglomerate improved its gross margins by 60 basis points to 55.4% on the back of improving operating margins in the Nutritionals and Diagnostics businesses.
In the company's first quarter earnings, we expect operational sales to grow in the mid-single digits, driven by continued growth in Diagnostics and a marginal improvement in Nutritionals. Abbott's management stated in the previous earnings call that the company expected adjusted gross margins to decline to about 54% in the first quarter of 2014 on account of increasing competition, foreign exchange impacts and the supplier recall in Nutritionals. We expect gross margins to match company estimates.
Emerging markets contributed about 40% of total sales in the fourth quarter last year. We expect this to increase going forward as Abbott increases its presence in emerging markets such as China, India and Brazil, anticipating higher growth prospects compared to developed regions. The company introduced several new products last year and they are likely to contribute significantly to sales in the near future.
We have a price estimate of $40 for Abbott Labs, implying a premium of over 5% to the current market price.
Emerging Markets To Drive Growth In Sales
Sales in emerging markets grew 9% y-o-y in the previous quarter driven by strong performance in the Adult Nutrition business, Diagnostics and Established Pharmaceuticals (generic drugs). Together, the Nutritionals, Diagnostics and Established Pharmaceuticals divisions account for over 75% of Abbott's revenue and are likely to derive most of their future growth from emerging markets.
Countries such as China, India, Russia and Brazil continue to grow at a faster rate than most developed economies and have a rapidly growing middle class population. McKinsey & Company predicts that the urban household income in China will double by 2022 and that the majority of its urban consumers will earn between $9,000 and $34,000 annually by that time.  As the middle class continues to grow in these markets, people are likely to increase their discretionary spending on nutritional products (such as food supplements) and point-of-care diagnostics.
New Products Could Boost Sales
In 2013, Abbott launched several new products across its diversified businesses to boost sales and tap into new markets. This included over 70 new products in the Nutritionals, Diagnostics and Vascular divisions. Going forward, these new products are expected to significantly contribute to the company's sales. Some of these new products are as follows:
- XIENCE Xpedition drug-eluting stent - This is part of the Endovascular division and currently sold in international markets such as Japan and China. It is expected to contribute significantly to Abbott's efforts in increasing its global share in the stent market, along with its ABSORB product.
- MitraClip - This device is used to treat mitral (a valve in the heart) regurgitation. Its markets include the U.S. and Europe. It generated sales of about $130 million in 2013 and is expected to grow to $200 million by the end of this year.
- SUPERA Veritas - It is a stent used for treating blockages in blood vessels due to peripheral artery disease (PAD), a sickness that ails 27 million people in Europe and North America. It is also under FDA review for superficial femoral artery (SFA) treatment in the U.S. This is the flagship product of IDEV Technologies, a company which Abbott acquired in August 2013.
- Catalys - This optics product allows surgeons to replace manual steps in cataract surgery with computer-guided laser technology. Abbott acquired this product as part of its acquisition of OptiMedica Corporation in 2013 and it provides Abbott an entry point in the large and fast-growing laser cataract surgery market.
- Similac's Triple [ph] Pack - The company launched its flagship Similac infant formula product with an enhanced packaging solution for the online market in China. This is an example of innovation within existing products to tap into new markets and boost sales. (Abbott Reports Fourth-Quarter 2013 Results, Abbott Labs, January 22, 2014)
Disclosure: No positions.