Abbott Laboratories: More Insiders Buy As Acquisition Uncertainties Likely To Clear

| About: Abbott Laboratories (ABT)

Summary

Continued insider purchases are a signal to outside investors that the company’s shares currently are at a value-oriented price and that the St. Jude Medical acquisition will close.

Such insider purchases also support the belief that the company will resolve its’ ill-fated pending acquisition of Alere, Inc. at a mitigated cost to itself.

U.S. regulators are likely to approve the company’s acquisition of St. Jude Medical soon (following the European Union’s approval).

The company need not close the Alere acquisition if there are any occurrences relating to Alere that have a “material adverse effect” on the acquisition’s value.

Multiple insider purchases indicate confidence in the company’s stand-alone prospects; the St Jude Medical acquisition benefits; and mitigation of Alere acquisition damages.

Continued Abbott Laboratories (NYSE:ABT) insider purchases are a signal to outside investors that the company's shares currently are at a value-oriented price and that the company will be able to close its acquisition of St. Jude Medical Inc. (NYSE:STJ) soon. Further, we see such purchases as a signal to outside investors that ABT will be able to resolve its' ill-fated pending acquisition of Alere, Inc. (NYSE:ALR) at a mitigated cost to ABT. As readers may remember, earlier in 2016 investors sold off the company's shares given uncertainty and drama surrounding two of its major acquisitions. On a positive note, a U.S. regulator approval of ABT's acquisition of STJ is imminent (and follows European Union approval of the acquisition in late November 2016). ABT entered into an agreement to acquire SJM for $25 billion earlier in 2016 and ABT and STJ later agreed to sell certain products to Terumo Corporation in an all-cash transaction of about $1.12 billion to help close the STJ acquisition. ABT will benefit from its acquisition of STJ, which will bring to the company an industry leading pipeline of products relating to cardiovascular, neuromodulation, diabetes and vision care. While approval and closure of the acquisition of STJ is likely and beneficial to ABT, the company's pending acquisition of ALR is a more complex scenario that ABT has clearly wanted to back away from ever since ALR revealed information that make it a damaged acquisition target.

Early in December 2016, ABT filed a complaint in a Delaware court seeking to terminate its proposed merger with ALR because ABT believes that ALR "is no longer the company [ABT] agreed to buy when the parties signed their merger agreement in January [2016.]" ABT is attempting to back out of its $5.8 billion acquisition given that it believes that ALR acted deceptively during acquisition negotiations by withholding information about U.S. federal investigations. (Outside of the litigation between ABT and ALR, ALR was already under investigation by U.S. federal prosecutors in regard to its overseas sales practices under anti-bribery laws.) In its Complaint, ABT pointed out that: 1) an ALR subsidiary billed the U.S. government for services to hundreds of deceased persons over a five-year period, leading to the revocation of its Medicare enrollment; and 2) less than a month after the parties signed the merger agreement, ALR announced that it would be unable to file its 10-K in a timely manner due to an ongoing investigation of revenue recognition issues. In its Complaint, ABT set forth numerous additional problems plaguing ALR since each party entered the acquisition agreement. ALR, of course, believes ABT's lawsuit is entirely without merit by stating that "none of the issues ABT] has raised provides it with any grounds to avoid closing the merger" and that ALR has "complied with its contractual obligations under the merger agreement …." An important aspect of the litigation is that there is a clause in the acquisition agreement that states ABT need not close the merger if there has been any occurrence that has had or would reasonably be expected to have a "material adverse effect" on ALR's value.

Investors clearly believe that ABT is likely to be able to walk away from its pending acquisition of ALR with minimal damage to itself or its shareholders given that ALR's shares trade at about $40 a share, far below the $56 per share price that ABT agreed to pay ALR shareholders. As noted below, ABT insiders are also apparently positive about their company's ability to close its acquisition of STJ and to walk away from its pending acquisition of ALR with minimal adverse effects to itself. Although we cannot determine the outcome of the litigation between the parties, our belief is that ABT, the larger and more high-powered party to the acquisition, will likely be able to: 1) walk away from the acquisition with a payout to ALR; or 2) acquire ALR for a significantly lower purchase amount due to deceptive negotiating practices by ALR during acquisition talks. Regardless of the outcome of the ABT/ALR litigation, we believe that the multiple insider purchases of ABT shares by the company's executives speaks to their confidence in regard to ABT's: 1) stand alone prospects; 2) successful STJ integration prospects; and 3) ability to mitigate damages resulting from its disputed acquisition of ALR. We note further that the closure of the SJT acquisition will allow ABT to expand its heart device business and allow it compete against larger rivals Medtronic Plc (NYSE:MDT) and Boston Scientific Corp (NYSE:BSX).

Not only will the SJT acquisition allow ABT to drive revenue and earnings growth, but ABT's internal research and development will also allow it to drive revenue/profit growth. As ABT moves towards closing its acquisition of STJ and resolving its disputed acquisition of ALR, we should note that the company's third-quarter 2016 results were better than expected due to the strong performance of its established pharmaceuticals ("EPD") and medical devices divisions. Additional good news to support revenue growth going forward for the company is the U.S. FDA's approval of the company's Absorb product, the only fully dissolving heart stent, and Tecnis Symfony intraocular lenses for the treatment of cataracts. With this in mind, we note further that ABT has been positioning itself for improved revenue/profit growth over the long term through various divestitures and acquisitions. In recent years, ABT sold its slow-growth developed markets branded generics pharmaceuticals business to focus its higher-growth branded generics pharmaceutical business on emerging markets. The company also sold its medical optics business to Johnson & Johnson (NYSE:JNJ) to allow it to focus on obtaining leadership positions in cardiovascular devices and its expanding diagnostics business. In addition, ABT's newly approved innovative products are likely to drive revenue/earnings growth. The company currently yields about 2.75 percent, and has an extensive history of yearly dividend increases. Despite near-term STJ and ALR acquisition uncertainties, we believe the multiple insider purchases by ABT executives are a significant signal of confidence in the company's long-term prospects despite near-term adversities. We also believe that investors should consider the company's shares now as tax-loss selling will abate in 2017.

Multiple insiders continue to buy as acquisition uncertainties are likely to clear.

When we write about insider buying activity we typically note "one of the most positive signs to a potential investor in a company's stock is an insider purchase of its shares on the open market." We can expand on this notion further by stating that multiple insider purchases, especially close to 52-week lows, are an even more powerful signal to outsiders of such insiders' belief in actions being taken by a company to drive revenue/earnings growth over the intermediate and long term. In an earlier article on ABT we discussed insider CEO Miles White's multiple purchases of 369,950 shares at $40.35 to $40.45 in November 2016 for a total cost of about $15,000,000. In such article, we noted our belief in the significance of such multi-million dollar purchase closer to ABT's 52-week low given that Mr. White's position allows him to have the most knowledge about the direction ABT is taking with respect to current and future product offerings, the company's financials, restructuring activities and the outcomes of any acquisition uncertainties. Although we find Mr. White's insider purchases significant on their own, other insiders continued to purchase the company's shares into late December 2016.

Robert Ford, Executive Vice President of Medical Devices at ABT, purchased 12,775 shares at $39.07 on December 14, 2016 for a total cost of about $499,120. In addition, Brian Blaser, Executive Vice President of Diagnostic Products at ABT, purchased 15,580 shares at $38.43 on December 20, 2016 for a total cost of about $598,739. We find such continued insider purchases in addition to Mr. White's significant purchases continue to add to our confidence in continuing to invest in ABT's shares. While ABT faces multiple acquisition-related uncertainties, as noted above, such insider purchase activity indicates a positive resolution of any outstanding acquisition uncertainty in ABT's favor. In particular, we believe that such insiders likely believe that the U.S FTC allows ABT to acquire STJ soon. We also believe that such insiders also appreciate ABT's ability to integrate STJ successfully and drive revenue/earnings growth from such acquisition.

Each insider also has intimate knowledge as to whether ABT will complete the troubled ALR acquisition or not. Such insiders likely understand the worst-case outcome of the litigation involving the pending ALR acquisition and likely also have a clear idea whether ABT can walk about from the ALR acquisition and the ability of ABT to mitigate the cost to walk away from such acquisition. We see such multiple insider purchases as a sign of their confidence in the company despite its shares trading near a 52-week low. Each insider is signaling with their purchase that ABT shares are beginning to represent value at his purchase price while also offering an about 2.75 percent dividend yield. With ABT shares trading at about the insider's purchase price, potential investors with a long-term holding period currently have the opportunity to purchase this company's shares at a price similar to such insider purchases or lower on a continued market sell off.

Our view

We continue to believe that ABT is optimally positioned within the global healthcare markets, particularly in emerging markets. As noted above, the company sold its developed markets established pharmaceuticals unit, which was expected to experience slow growth. Much of ABT's effort to drive improved revenue and profit growth involves divestitures and acquisitions. ABT, by selling its slow-growth developed markets branded generics pharmaceuticals business, will allow it to focus on its higher-growth branded generics pharmaceutical business in emerging markets. As also noted above, the company aims to obtain leadership positions in cardiovascular devices and its expanding diagnostics business. Further, ABT's newly approved innovative products noted above in recent developments are also likely to drive revenue/earnings growth. Finally, ABT is in the midst of efforts to improve productivity and efficiency to enhance growth. With ABT's STJ closure about to be approved, the company is also likely to be able to walk away from its ALR acquisition given its strong litigation position that ALR committed certain actions that damaged its value to ABT.

ABT's forward price-to-earnings ratio is about 17.40 based on 2016 earnings estimates of $2.21, and about 15.90 based on 2017 earnings estimates of $2.42. We believe that, with overall markets at or near record highs, an investor could wait for ABT's share price to pull back to a range of about $36.30 to $38.75 to establish a full position. (A forward price-to-earnings ratio in the range of about to 15.00 to 16.00 based on fiscal year 2017 estimates). Given that ABT's share price is quite close to our buy range and is at about the price paid by ABT's multiple insiders, investors can feel secure purchasing the company's shares immediately. Although ABT is in transition, investors will benefit long term with share price appreciation, dividend increases and share buybacks as the uncertainty surrounding company's multiple acquisitions clears up.

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Disclosure: I am/we are long ABT, JNJ.

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.