I wrote an article on April 17th about Abbott Laboratories (NYSE: ABT). In the article I mentioned Abbott's momentum that should continue up to about 65 according to analysts before a lull in the price because of the impending split. I suggested a short term income play and here is what I wrote:
The Options Play
- Buy August 2012 '60' call (priced at $2.12)
- Sell August 2012 '62.50' call (priced at $1.00)
- Net Debt to Start: $1.12
- Maximum Profit: $1.38
Reasoning behind the Trade
- Momentum will be slowing down soon.
- Analysts had the price range around 60-65 and it is there.
- Looking for a lull before the split.
This play turned out to be successful and here are the stats on it.
- Sell Aug. 60 at $4.05
- Buy Aug. 62.5 at $1.96
- ($4.05 - $1.96)= $2.09 gross profit
- ($2.09 - $1.12)= $0.97 net profit
- ROI- 86.6%
The stock is presently trading at 64.65, close to the point where analysts believe it may rest before splitting. So how healthy is the stock today and what are the ramifications of the split in today's market environment?
Earnings and Sales
This last quarterly report, Abbott's profits hit $1.97 billion, or $1.23 per share, which beat analysts by a penny. But as is the pattern with most companies right now, sales came in slightly below analyst estimates, at $9.81 billion, compared with the expected $9.84 billion. Even though there was a slight gain in sales, earnings declined because of the added structuring cost of the upcoming split.
Competitor Johnson & Johnson (NYSE: JNJ) seemed like it rehearsed the same song as Abbott when each contributed (less than stellar) numbers to unfavorable currency-exchange rates. The dollar has been strengthening against the euro and the exchange rate has reduced Abbott's sales growth by 4.7 percentage points. But on the brighter side, with 2012 earning estimates overall increase of 65% to $5.05 the company should touch a historical high. How limited is the company's continued growth potential this year.
Abbott Fundamentals are as Strong as Ever
Although it revealed a modest revenue growth, the company is not doing as well as the industry average of 5.7% compared with its 2%. With a 12.2% decrease in earnings year over year, it has struggled with volatility lately. But, analysts are bullish on the future and expecting good EPS growth in the coming year. Remember, this year's improvement is suppose to be $5.05 versus $2.99 the previous year.
In terms of gross and net profit margins, (63.30% and 17.6%) respectively, Abbott compares favorably with the industry average again. And in terms of value, the stock is worth more today than it was a year ago and has outperformed the market as a whole. Some analysts are concerned that it might be on the verge of getting a little pricey, but the company is strong and may be able to justify and even demand a higher price. And of all its competitors like Pfizer (NYSE: PFE) and Merck (NYSE: MRK), some believe only Abbott is capable of achieving 10% annualized growth over the next few years.
So presently I am not looking at this stock for more option plays. But as we get closer to the split, I expect that the price of this stock will level out until the split is over and then watch both companies increase in value-at least for the short term.
The Breakup & Risks with AbbieVie
Humira is (and will be) the one product as the center piece of revenue for the new Abbott pharma company AbbVie. In the second-quarter it brought in a cool $2.3 billion, which is a 16.5% increase and a big contributor to Abbott's sales growth for the quarter. When the company does split, it is important to note the sizes of each new company. The pharma division of the company brought in $3.8 billion or 45% of the company's revenue.
It appears Humira is destined as the big bread winner for AbbieVie and is expected to grow quickly - until it stops. And it is important to see that there is a good chance it will stop. Humira becoming the dominant bread winner for the new company is not healthy long term. Revenue, profit, and cash flow put on the shoulder of one main drug is not good. Can the drug stand up to oral rheumatoid arthritis drugs being developed by Pfizer and others? So AbbieVie may be a risky play in the future. What are the possible long-term threats? Knock off versions of the drug could potentially cut into revenue if the FDA approves biosilimars.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
