Abbott: This Market Leader Is A Buy

Dec.13.11 | About: Abbott Laboratories (ABT)

Abbott (NYSE:ABT) is a global, broad-based healthcare company devoted to the discovery, development, manufacture and marketing of pharmaceuticals and medical products. Abbott’s primary businesses include pharmaceuticals, with key therapeutic areas including immunology, cardiology and infectious diseases; nutritional products for infants, children and adults with special dietary needs; and medical products, including vascular, laboratory and molecular diagnostics, vision care and diabetes. The company employs approximately 90,000 people and markets its products in more than 130 countries.

MARKET LEADER

From modest origins 120 years ago, Abbott has grown into a diversified healthcare company with worldwide sales topping $35 billion. Abbott boasts market leadership positions in pharmaceuticals, nutritional products, medical devices and diagnostics. This balanced portfolio of multiple core growth franchises has led to steady sales growth over the years.

Abbott is expanding its leadership internationally and is now the number one pharmaceutical company in India. In 2010, international sales of $20 billion accounted for more than 57% of total sales. Additionally, 25% of 2010 worldwide sales were from emerging markets giving the company a strong foothold in countries expected to provide 70% of the growth in the healthcare market in the next 5 years.

Abbott is the leader in treatment of rheumatoid arthritis, Crohn’s disease, psoriasis, cholesterol management, HIV, and testosterone replacement. Growing at a 20% annual rate, HUMIRA, the company’s largest prescription drug, has over 500,000 patients in 83 countries. Abbott is the fastest-growing international nutritional company with double-digit international sales growth. Market leading nutrition brands include the number one infant formula, Similac, and the number one hospital product, Ensure.

In vascular products, Abbott’s XIENCE line is the number one drug-eluting stent, and the company is also the leader in bare metal stents, carotid stents and guide wires. Abbott is a leader in research with over 30 new medical devices in development and a pharmaceutical pipeline that has tripled new molecular entities in development over the last four years.

click to enlarge

Click to enlarge

STRONG THIRD QUARTER

Abbott reported double-digit revenue growth in the third quarter with sales of $9.8 billion. This is the 17th quarter out of the last 18 with double-digit growth despite the worldwide recession. Emerging market sales grew 21% and now represent 26% of worldwide sales. HUMIRA continued to grow over 20% annually. Abbott reaffirmed its 2011 EPS projection in the range of $3.10-$3.12. The company also declared a quarterly dividend of $.48 per share, the 351st consecutive quarterly dividend paid since 1924. Abbott’s dividend currently yields a healthy 3.7%.

CORPORATE SPIN-OFF

Abbott recently announced a tax-free distribution to shareholders realigning its business into two entities. One entity retaining the Abbott name will be a diversified medical products company including branded generic pharmaceuticals, medical devices, diagnostics and nutrition. With $22 billion in sales, Abbott will focus on diversified products with most of its sales generated outside the U.S. and in fast growing emerging markets. This entity should produce high single-digit sales growth and double-digit EPS growth.

The second business will focus on proprietary pharmaceuticals and biologics with a sustainable portfolio of market leading brands, including HUMIRA, Creon and Synthroid. Additionally, the business will have a strong pipeline of innovative R&D assets with more than 20 new compounds or indications in phase 2 and 3 development and $18 billion in sales. It will focus on developed markets for the sale of select specialty products and breakthrough innovations.

Although the details of the transaction, which is expected to close by year-end 2012, are still being worked out, both firms are projected to have strong balance sheets and cash flows with dividends equal to the current combined entity. While we like the economies of scale and diversified business base of the current company, the realignment appears to be based on a sound business strategy which should provide for the long-term growth of the separate entities. Buy.

Disclosure: Hendershot Investments holds a long position in each stock presented. The content in this article should not be taken as investment advice or construed as a recommendation to buy or sell any security. Ideas expressed may not be suitable for every account, depending on an individual’s investment objective, risk-tolerance and financial situation. Information presented here was obtained from sources believed to be reliable but accuracy and completeness and opinions based on this information are not guaranteed. It should not be assumed that investments discussed will be profitable or will equal the performance of securities listed here or recommended in the past. All data, information and opinions expressed are subject to change without notice. Further information on companies mentioned is available upon request.