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Reported figures for the third quarter show that revenues for Abbott Laboratories (ABT) fell by less than 1% to $9.77 billion. Analysts had expected a revenue figure of $9.94 billion. EPS for the quarter, however, beat analyst expectations and stood at $1.3, excluding onetime items, against a consensus estimate of $1.28. The company's shares are down 4.28%. The stock has yielded a one-year return of 36%. The company also recorded $478 million of restructuring charges relating to job cuts.

We believe the stability that the company will gain from the proposed spin-off is priced in, and we do not forecast capital appreciation at this point. We therefore recommend the stock as a hold.

Company description:

Abbott Laboratories discovers, develops and manufactures a wide variety of healthcare products and operates through five segments, namely Proprietary Pharmaceutical Products, Established Pharmaceutical Products, Diagnostic Products, Nutritional Products and Vascular Products. Although the company does not face many patent expirations in the near future, it will face generic competition in the future due to the patent loss for TRICOR in July this year.

ABT's blockbuster drug remains HUMIRA, which will also be a key driver of growth for AbbVie. Last year, the drug accounted for 20% of total revenues and substantial double-digit growth this year. Sales of the drug in the current quarter rose 15.3% to $2.3 billion. There are several factors that contributed to this strong performance, including 1) increasing patient demand that led to a market share increase in dermatology and gastroenterology, and 2) its approval for new indications for example UC in the U.S. and Europe, and axial SpA in Europe, with the drug being approved for a total of 8 indications. Furthermore, emerging markets were a strong contributor to earnings with sales for the quarter reaching $2.6 billion, representing an increase of 10% on an operational basis.

The company's nutrition business faced some challenges when it recalled its infant formula Similac back in 2010. Since then, the company has bounced back in its high cash flow generating segment and recorded double-digit growth in its key pediatric and adult nutrition products like PediaSure Clear, Similac with Lutein, Ensure Clear and Glucerna Hunger Smart.

Abbott is a leader in the global nutrition market and is set to benefit from the increase in the global nutrition market, which will grow to $50 billion by 2016 from the current figure of $35 billion. An aging population and low penetration rate of nutritional product will fuel growth. The business has performed well within the U.S. and plans to rapidly progress outside the U.S. by investing in product pipeline and infrastructure, bolstered by modern manufacturing facilities in India and China. China remains the largest market for the nutrition business and has a potential of $7 billion.

The company has plans to spin off the pharmaceutical segment into a separate entity by the end of 2012. AbbVie, the name suggested for the new entity, will be focusing on branded brands like Humira. The move is driven by a belief to isolate Abbott from the uncertainties of the pharmaceutical business, which involves the constant struggle to innovate and bring new drugs into the market to generate a steady stream of revenues. Instead, the business will be left with the stable and predictable business of nutrition, generic drugs and heart stents, and thereby generating more predictable cash flows for its shareholders.

Valuations:

Table 1:

ABT

Pfizer (PFE)

Roche (OTCQX:RHHBY)

Novartis (NVS)

GlaxoSmith Kline (GSK)

Merck (MRK)

Avg

Forward P/E

13x

11x

13x

12x

10x

13x

12x

Dividend Yield

2.90

3.5

3.81

4.03

5

3.68

The dividend yield provided by the company is the lowest amongst its competitors cited above. The total debt-to-equity ratio is 74%, along with an interest coverage ratio of 14.5x. We do not forecast price appreciation at the moment, and therefore recommend the stock as a hold. The company has maintained a three-year average dividend coverage ratio of 2.5x, representing its substantial cash flow to make payments to its shareholders.

Source: Abbott Laboratories: No Capital Appreciation For The Stock