2 Long-Term Winners

Includes: ABT, KO
by: Dutch Trader

The global economy has weakened, however we are not heading for a worldwide recession as some pundits predict. The euro crisis is the key factor for this slowdown.

Europe has still not found a definitive solution to the crisis but some progress has been made; reduced budget deficits and the new Fiscal Compact and the European Stability Mechanism. Assuming that policymakers worldwide act as needed in the months ahead, confidence should improve and the global economic recovery will regain momentum.

The equity markets are volatile and because of the very cloudy growth outlook investors are highly critical of the selection process for equities.

Concentrating on long-term trends remains a valid strategy. Some long-term trends are:

  • Industrialization in emerging markets
  • Growth of the world population, driven by higher life expectancy and urbanization
  • Accelerating expansion of middle-income households in emerging markets, with a focus on demand for Western goods and premium brands.

Long-term investment trends can be linked to long-term winners. So I selected two "old style" stocks that are not trendy but have proven to be great investments for the long run.

Abbott Laboratories (NYSE:ABT)

Abbott Labs has changed during the last few years and now has a strong focus on higher margin and higher growth businesses. Abbott is the No. 1 producer of medical nutrition worldwide, which generates 17% of total sales. The company derives about 56% of total sales from pharmaceuticals. It has a solid pharma product portfolio with four blockbusters: Humira (rheumatoid arthritis), Depakote (epilepsy), Kaletra (HIV) and TriCor (cholesterol). Humira is the most important growth driver through new indications. With Guidant Vascular, the company bought the best in class drug-eluting stent Xience V as well as the Promus Stent. ABT's market share in Stents is now more than 50%.

The company reported EPS of $1.03 with $1 expected for Q1 2012. Revenue rose to $9.46 billion with $9.35 billion anticipated. Guidance is raised now for 2012 to $5 to $5.10 (+ 5 cents). EPS can reach $1. 20 - $1.22 with consensus now at $1.21. Humira (MS drug) sales were again the main driver with sales at $1.93 billion and $1.85 billion expected (+19%).

Abbott is planning to split the company in two parts by the end of this year, which will bring forward the undervaluation of the pharma business and possibly also the mixed bag of business that will continue to be called Abbott Labs (nutrition, diagnostics, generics).

Good Q1 figures for this high quality and growth generating pharmaceutical. The split of the activities is generating some excitement but not too much yet. Especially nutrition/babyfood is in the picture again, so the possibility of divestment will lead to renewed investor focus.

New drugs are now concentrated on the vaccines area with the new Hepatitis C drug now in development. The investment in Dutch biotech company Galapagos also focuses on vaccines.

This high cash generating pharmaceutical has little patent expiry exposure and has a real biotech blockbuster (Humira) in its portfolio. With a P/E below 11 and a dividend yield of more than 3%, I wouldn't avoid it like Morgan Stanley. The company has several catalysts that could be beneficial for the stock price.

Coca-Cola (NYSE:KO)

Coca Cola's first-quarter sales rose 5.6% year-over-year to $11.14 billion, beating consensus estimates of $10.82 billion. Global volume growth of 5% was well ahead of the Street's forecast, and price/mix added 3%, leading to organic sales growth of 8%. Net income increased 2.7% to $2.05 billion and EPS gained 8.5% to 89 cents, two cents above analysts' expectations.

Gross margin declined 180 basis points to 60.7% on input costs inflation. Efficiency improvement helped mitigate the margin pressure at the operating level, with EBIT margin down only 70 basis points to 23.0%.

Volume performance beat expectations in all regions with North America (+2.0% vs. consensus at 0.8%) posting the biggest positive surprise, followed by Eurasia/Africa (+9% vs. consensus at 5.5%), and Pacific (+8% vs. consensus at 5.5%). Europe remained in positive territory (+1% vs. consensus at 0.7%) despite tough operating environment.

The company maintained its guidance for 2012, expecting mid single-digit EPS growth, annual cost savings of $550-$650 million by 2015 and input costs inflation of $350-$450 million.

The two-for-one stock split if approved on July 10 would double Coca-Cola's outstanding shares to 11.2 billion from currently 5.6 billion. The split would be the 11th stock split in Coca-Cola's 92-year history. One share of stock purchased for $40 in 1919 would be worth $9.8 million today, with all dividends reinvested annually.

A nice beat, especially at the volume level. KO's shares are primarily driven by volume development. So respectable volume figures should give KO's shares a strong support in the future.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ABT, KO over the next 72 hours.