Abbott Laboratories Shares 'Marked Down' - Good Time to Buy?

Over several decades a fixture in both its Industry and the larger market/economy, Abbott Labs (ABT) has been tagged with a share price markdown in recent weeks. From the low-mid 50's of not long ago it now struggles to hold onto $47, slightly over 5% atop its 52 week closing low but fully 17% beneath its 52 week best. Similarly as with both 50 and 200 day moving averages north of 50, the stock is now offered at noticeable discounts. What has brought this about, and what should the savvy investor do about it?

Among the pharmaceutical entrants ABT has stood aside with a fairly low --- either side of 60% --- revenue component derived from prescription compounds, the remainder faithfully arriving through nutritional supplements and an assortment of diagnostic and testing devices aimed at vascular and other health shortcomings. Put another way, its product slate is comparatively diversified. It has nonetheless been widely noticed and documented that the company's pipeline of life-supporting medications had become weak, or, as one commentator cleverly put it, ABT was not delivering enough "shots on goal" toward the Food and Drug Administration's net minders, who in the meantime have grown more demanding and selective before escorting a new member through Phase III clinical trials. In addition to bolstering research and development outlays, Abbott's management elected to mobilize its fortress balance sheet, sporting $12.68 net current assets per share at year end 2009, toward buying its way to a prosperous future.

Beginning last year and continuing in earnest throughout 2010 the company executed some high profile purchase acquisitions. In sequence this year have come a $6 billion outlay for the pharmaceutical unit of a privately held Belgian conglomerate Solvay, followed up with --- presumably while the corporate checkbook had yet to be returned to the safe --- another $2.2 billion in exchange for India-based Piramal Healthcare Ltd. A few others of lesser dimension bring this year's cash outlays to the area of $9 billion, enough to rearrange balance sheet entries in ways not altogether welcome to some. Nothing truly threatening or that cannot be reversed with astute management in coming periods, but it remains true that for the time being common equity has slipped to below 40% of footings. Debt ratios however measured have risen, and interest coverage multiples have softened, from over 12 times to under 8. The nature of the acquisitions --- in formal accounting parlance the purchase method ---- further gives rise to such balance sheet "assets" as goodwill and other intangibles, neither of which produce anything, but each of which must be expensed against revenue. So burdened, the June and September Quarters (ABT keeps a December Fiscal Year) struggled to meet prior earning estimates, leaving the path of least share price resistance down. Consensus postings of $4.15 or so for this year and $4.65 for 2011 will be met, if at all, only by excluding the effects of presumably one-off accounting charges.

Atop the foregoing is Humira, long an autoimmune all-star performer but estimated by some as by itself representing 20% of the firm's $72 billion total market value. It seems that the folks over at Johnson & Johnson (JNJ) detected patent infringement and whose attorneys prevailed in the opening round, prompting Abbott to set aside --- in plain view on its own balance sheet --- $1.8 billion in escrow toward an eventual adverse legal outcome. Needless to say the competing arguments rest now in an appellate jurisdiction, with each side doubtless prepared to introduce them before the Supreme Court of the United States. Predicting outcomes in matters of this nature lies outside the pale of orthdox financial analysis and accordingly none is ventured here.

A veteran and skilled management team reports for duty each working day to the Abbott's Northern Illinois headquarters, a group having a demonstrated history -- most recently with the assimilation of Guidant's stent portfolio --- of success in weaving the new entrants smoothly and economically into the Corporate dynamic. Investors are advised to continue votes of confidence in ABT's resumption of robust health and prosperity, especially as such elections can now be cast at less than 11.5 times this year's number and with close to a 10 P/E ratio on the next. Although recent reports are of a slight decline in the short interest, marshalling a variety of other metrics points in the direction of a low-mid 60's share price over the next 12-18 months could be enough to serve up a 30-33% capital gain escorted by the current 3.70% cash dividend yield. A computed Beta of less than 0.50 rounds out the frame in ways that should incline the prudent investor to take a long stand at current prices.

Disclosure: No positions

Source: Abbott Laboratories Shares 'Marked Down' - Good Time to Buy?