Abbott And CFR Pharmaceutical - A Good Investment Combo

Jun.11.14 | About: Abbott Laboratories (ABT)

Summary

Abbott Labs is seriously contemplating selling off a portion of its senior drugs that generate roughly $2 billion in annual sales.

The company has recently announced an agreement to acquire CFR Pharmaceuticals located in Latin America.

The acquisition would not only complement the existing businesses of Abbott but would also enhance the company’s geographical presence.

Abbott Laboratories (NYSE:ABT) is a global healthcare company that generates revenue through four operating segments: pharmaceuticals, medical devices, diagnostics, and nutrition. The company has devoted its efforts to the discovery, development, manufacturing, and marketing of health related products. The following discussion highlights the company's efforts to strengthen its top and bottom lines in the future, strengthen its existing businesses, and increase its geographic presence.

Revenue Distribution

Geographically, the company extracts approximately 60% of its revenues from developed markets while the remaining percentage is drawn from the developing markets. Distribution of the aggregate top line of the company among its four operating or functional segments is graphically represented in the following chart.

Source: Annual Report, 2013

Financial Standing

Over the first quarter of FY2014 the company saw weakness in its top line and that caused a decrease of 2.5% due to currency translations. Although the company's profit margins are high they are following a decelerating trend while sales have been on a decline in the US. Weakness was also seen in the company's established pharmaceuticals segment which saw a decline in revenue of 3% YoY last year. According to recent news, the company is seriously contemplating selling off a portion of its senior drugs that generate roughly $2 billion in annual sales. Coupled with this sell off is the hyped acquisition of CFR Pharmaceuticals whose impact will be discussed in the next section of this article.

Upon further digging, we see that Abbott's ROE is almost 55% lower than that of the industry with Abbott's ROE trending at 9.47 while the industry's looms around 20.88. DuPont Analysis reveals that although the company generates better than industry net profit margin and a lower share of its assets are being financed through debt the company is extremely inefficient in deploying its assets. A comparison of the company and industry is shown in terms of DuPont breakdown below.

Source: Reuters

The asset turnover ratio of the company falls short of the industry average by 55% which is reflected in the ROE figure of the company. Asset efficiency is one arena where Abbott presently lags behind its peers; however, the company is taking steps to bring forth improvement in this regard.

Abbott Acquires CFR Pharmaceuticals

Abbott Labs is making investments in high growth markets to enhance its competitive position and better utilize its assets. That being said, the company has recently announced it would acquire CFR Pharmaceuticals located in Latin America. The acquisition is intended to up the revenue chunk and market share of the company in the domestic market. In fact, CFR's addition to the company's asset base would put Abbott amongst the top ten pharmaceuticals in Latin America.

The acquisition is expected to be highly beneficial for Abbott as it would add roughly $900 million to the top line of the company upon its first full year of sales (FY2015); however, the impact would be negligible on FY2014 earnings. The top line enhancement translates into an additional per share earnings of $0.07.CFR's acquisition is expected to be concluded towards the end of the present year and would strengthen various units of the company, namely the women's health, central nervous system, respiratory, and cardiovascular units.

Note that CFR itself distributes its products in 15 countries. This means that the acquisition would not only complement the existing businesses of Abbott but would also enhance the company's geographical presence. The Latin American pharmaceutical market is estimated to reach $73 billion by the end of the present year and is projected to grow at a rate of 14% through 2018 to $124 billion as forecasted by IMS. CFR's sales are expected to grow tremendously across the emerging markets which are key growth areas for Abbott. CFR's Cardio pharmaceutical unit realized a growth rate of 26% in sales driven by Central America, Peru, Chile, and Columbia whereas Neumobiotic sales marked approximately 29% growth across Chile, Peru, Columbia, Paraguay, and Bolivia. The CFR acquisition would also allow Abbott to enter the Asian market and establish its foothold there.

Shareholders' Returns

Abbott Labs' dividend yield of 2.23 is superior to the industry average of 1.66. The company distributes as much as 45% of its profits among its investors in the form of cash dividends. Take a look at the following chart to see the dividend yield and the declining trend of outstanding shares.

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Source: Ycharts

Moreover, Abbott's total shareholder returns continue to trend higher than the S&P 500's returns over the years.

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Source: Company Presentation

Conclusion

In my opinion, the company is a strong buy. CFR Pharmaceuticals would greatly enhance the company's geographical presence and would indeed be a great add-on to the top and bottom line performance of the company. Investors would not only profit from the price appreciation in the following years but the company's own policy to reward investors is quite enticing as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.