Abbott Labs: 3 Reasons to Be Long-Term Bullish

| About: Abbott Laboratories (ABT)

Abbott Labs (ABT) opened with a pop on April 4th, 2011, following a positive review by Barron's senior editor Michael Santoli. The bullish call for Abbott is based upon thorough analysis of the company's fundamentals and can be summarized with a simple message: The stock is "unloved and undervalued."

In our opinion, the case to own ABT is even stronger. Three main factors affect a stock's market price: Fundamentals, technicals, and sentiment. All three factors are improving for Abbott, providing a tail wind to the stock for the rest of the year. Let's review each factor separately.

  1. Fundamentals

Abbott, with a market cap of $76 billion, is a well-run large cap pharmaceutical company and its CEO, Miles White 51, has made Barron's annual list of the top 30 most respected CEOs for the past three years.

  • The company has a well-diversified mix of products with three separate business divisions (Pharmaceuticals, Nutrition, and Medical Equipment) which should mitigate revenue losses when the patent for its leading drug Humira, for the treatment of rheumatoid arthritis, expires in 2016.

  • It operates internationally with bright prospects outside of the U.S., as the acquisition of Solvay last year makes it the leading branded-generics drug maker in India.

  • It has a hefty 4% percent dividend yield with an excellent track record of increasing the dividend payout for 39 straight years.

  • The company trades at a P/E ratio of 10.7 (at the lower end of its historical P/E range) reflecting uncertainty regarding Obamacare, the threat of patent expiration and the lack of new blockbuster drugs. With projected earnings per share of $4.59 in 2011, analysts have a $62 price target on the stock, implying a P/E ratio of 13.5 still lower than the S&P 500 multiple.

  1. Technicals
  • ABT has been in an upward trend for 20 straight years.

(Click chart to enlarge)

We downloaded weekly prices from Seeking Alpha's database between January 1st, 1991 and April 4th, 2011 to build the 20-year stock chart above.

line that trends up (the support line) is drawn by connecting the higher lows made by the stock between 1991 and 2011. The stock has been and remains in an upward trend for 20 consecutive years. As long as the support line is not violated, the upward momentum is intact. In fact, the longer the support line remains intact (and 20 years is quite a long time), the more confident we are in validating the upward momentum.

The line that trends down (the resistance line) is drawn by connecting the stock's lower highs in the last three years. Abbott's stock made an all-time high of $61.09 three years ago on January 10, 2008 and is down 18% since then.

A triangle pattern is starting to emerge when looking at the support and resistance lines together. Although we can not say for sure which line will be broken first, two factors favor the stock breaking up to the upside. The support line has remained intact for a much longer time than the resistance line. The stock was rising when it entered the triangle. Once the support/resistance line gets broken, the downward/upward movement is likely to continue for a prolonged time.

  • ABT is in a short-term upward trend since February 1st, 2011.

Click to enlarge:

The stock made a a 52-week high of $53.75 on October 18th, 2010. It then started a three month long decline to reach a 52-week low of $44.59 on January 31st, 2011. ABT is on an uptrend since then, closing at $50.25 on April 4th, 2011.

The 20-day moving average (green line) is trending upward since the end of February 2011 and the 200-day moving average (red line) has flattened and is turning positive, two bullish events. The uptrend is confirmed by the rising Money Flow Indicator Index (MFI), implying that the stock is under accumulation.

Finally, the stock closed at $50.25 on April 4th 2011, well above the 200-day moving average of $48.91 which is very bullish and indicates that the stock should perform well in the coming weeks. A bullish cross-over between the 20-day moving average and the 200-day moving average would confirm the upward trend.

  1. Sentiment

Elsewhere we analyzed the causes for the lack of performance of large cap pharmaceutical stocks in the last decade (see "Big Pharma's Next Decade Won't Be Lost"). The inability of senior management to clearly articulate a strategy to right the ship has resulted in rock bottom valuations with single-digit P/E ratio for many large cap pharmaceuticals; ABT trades at a P/E ratio of 10.7.

As investors warm up to ABT's strong fundamentals and bullish technicals, we believe that valuations will improve throughout 2011. In addition, management has started to address shareholders' concerns for the stock's lack of performance. During Abbott's last conference call, Jami Rubin, a drug analyst at Goldman Sachs suggested that Abbott's stock is currently undervalued and could surge by 30% should management decide to break up the company. Management does not seem to favor the break-up strategy at this junction. Abbott's chairman and CEO Miles D. White acknowledged that there is no current plan for a breakup; rather the company's strategy is to bring valuation at par with S&P's multiple.

Disclosure: I am long ABT.

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