Abbott Earnings And Revenue Decrease, But I'm Still Going To Buy Cautiously

Apr.17.14 | About: Abbott Laboratories (ABT)

Summary

Earnings and revenue decreased annually and quarterly.

Foreign exchange continues to batter the company.

The company is so well diversified that a drop in one segment hardly affects the whole.

The last time I wrote about Abbott Laboratories (NYSE:ABT), I stated:

"Due to the bullish technicals, great near-term earnings growth potential, and great long-term earnings growth potential I'm going to be pulling the trigger on a very small batch of this particular name right now." Since that article was published, the stock is up 1.08% on the back of earnings, while the S&P 500 (NYSEARCA:SPY) was up 1.05%. Abbott Laboratories is engaged in the discovery, development, manufacture, and sale of a portfolio of science-based healthcare products, which operates in four segments: Diagnostics, Medical Devices, Nutritionals and Generic Pharmaceuticals.

The company reported earnings before the market opened on 16Apr14, and on the surface, all the results were mixed with the company reporting earnings of $0.41 per share (beating estimates by $0.05) on revenue of $5.24 billion (missing estimates by $50 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Net Sales

1Q14

4Q13

1Q13

Q/Q

Y/Y

Nutrition

$1,631

$ 1,702

$ 1,699

-4%

-4%

Diagnostics

$ 1,117

$ 1,196

$ 1,088

-7%

3%

Established Pharma

$ 1,151

$ 1,288

$ 1,232

-11%

-7%

Medical Devices

$ 1,312

$ 1,434

$ 1,328

-9%

-1%

Vascular Products

$ 634

$ 676

$ 648

-6%

-2%

Totals, $ in millions

$ 5,244

$ 5,652

$ 5,378

-7%

-2%

Click to enlarge

Because the company missed on revenues, I want to see which segments were the main contributors to the problem. Fortunately, Abbott is so diversified that all of its segments contribute about the same to the company. On a year-over-year basis, I only really see white noise and not a real dramatic impact on revenues. But on a quarter-over-quarter basis, I see one major outlier, the Established Pharma segment. The Established Pharma segment is focused on bringing value to patients through a portfolio of established pharmaceutical products in the developed world and particularly the fastest growing markets. On the quarter-over-quarter basis, the company lost 11% in revenues primarily due to unfavorable foreign exchange rates.

Income Statement

Income Statement

1Q14

4Q13

1Q13

Q/Q

Y/Y

Net Sales

$ 5,244

$ 5,652

$ 5,378

-7%

-2%

Cost of products sold, excluding amortization expense

$ 2,470

$ 2,613

$ 2,432

-5%

2%

Amortization of intangible assets

$ 174

$ 198

$ 199

-12%

-13%

R&D

$ 387

$ 386

$ 346

0%

12%

Selling, general, and administrative

$ 1,762

$ 1,701

$ 1,786

4%

-1%

Total Operating Cost and Expenses

$ 4,793

$ 4,898

$ 4,763

-2%

1%

Operating Earnings

$ 451

$ 754

$ 615

-40%

-27%

Interest expense, net

$ 23

$ 17

$ 26

35%

-12%

Loss on extinguishment of debt

$ -

$ -

$ -

N/A

N/A

Net foreign exchange (GAIN) loss

$ 2

$ 6

$ 29

-67%

-93%

Other (income) expense, net

$ 3

$ (3)

$ 6

200%

-50%

Earnings (loss) from Continuing Operations before taxes

$ 423

$ 734

$ 554

-42%

-24%

Taxes on Earnings (loss) from Continuing Operations

$ 84

$ 148

$ 10

-43%

740%

Earnings (Loss) from Continuing Operations

$ 339

$ 586

$ 544

-42%

-38%

Earnings from Discontinued Operations, net of taxes

$ 36

$ -

$ -

N/A

N/A

Net Earnings

$ 375

$ 586

$ 544

-36%

-31%

Net Earnings from Continuing Operations, excluding specified items

$ 641

$ 918

$ 674

-30%

-5%

Avg. # of Common Shares Outstanding Plus Dilutive Common Stock Options and Awards

$ 1,548

$ 1,567

$ 1,586

-1%

-2%

Diluted Earnings per Common Share from Continuing Operations, excluding Specified Items

$ 0.41

$ 0.59

$ 0.42

-29%

-3%

Click to enlarge

The first line item I noticed on the income statement is that amortization of intangible assets have decreased 12% from the prior quarter and 13% from the prior year. The next line item I noticed was that R&D spending was up 12% from the prior year, which is a great thing in the healthcare world, because if you're not innovating you're just going to be left behind. Total operating cost and expenses decreased 2% from the prior quarter, but increased 1% from the prior year. Operating earnings decreased 40% from last quarter and 27% from last year, primarily due to less revenue.

Net interest expenses increased 35% from the prior quarter but decreased 12% from the prior year. Net foreign exchange losses decreased 67% from last quarter and decreased 93% from last year. The unfavorable foreign exchange rates seem to be a continued theme for the company, and will continue to be the case unless the dollar begins to weaken against emerging market currencies. Other income increased 200% from last quarter but decreased 50% from last year. Earnings from continuing operations decreased in dramatic fashion, obviously, on a quarterly and annual basis, down 42% and down 24%, respectively.

Taxes on earnings from continuing operations decreased 48% from last quarter but increased 740% from last year. This made earnings from continuing operations come to a drop of 42% from last quarter and a drop of 38% from last year. Net earnings at the company decreased 36% from last quarter and 31% from last year.

Net earnings from continuing operations decreased 30% from last quarter, while the company managed to reduce the share count 1% in the same time frame. However, with the share reduction, the bottom line was impacted dramatically with a 29% drop.

Conclusion

The company reported earnings, which were 3% lower than a year before on slightly less revenue, while the share price was up 3.37% in the past year excluding dividends. The share count has decreased slightly for the entire year. I definitely hate that both earnings per share and revenue were down year over year. I do like that R&D spending increased for the entire year. I for one don't think the company should be purchasing shares right now and wait for a gift from Mr. Market, as I see the market pulling back right now. I know I wrote an article last night saying that this is a solid dividend stock and I still believe that it is, but I'm going to lighten up on my purchases in it right now because I want to make sure the sequential decrease in earnings isn't a trend.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long ABT, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.