Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Abbott Laboratories (ABT) have lost some 4.5% of their value over the past week. The medical device manufacturer and developer of pharmaceutical drugs, reported its third quarter results on Wednesday before the market open.

Third Quarter Results

Abbott reported third quarter revenues of $9.77 billion, down 0.4% on the year. In constant currencies, revenues were up 4.1%. Foreign exchange headwinds were bigger than analysts anticipated, who expected Abbott to report $9.94 billion in revenues.

The company reported net earnings of $1.94 billion, up from $303 million last year. Last year's earnings were severely impacted by a $1.4 billion after-tax charge related to litigation reserves.

Diluted earnings per share came in at $1.21, while adjusted earnings per share rose 10.8% to $1.30 per share. Earnings beat analysts consensus by two cents.

Adjusted earnings exclude the $527 million costs associated with the split off of the company and restructuring and integration costs, partially offset by a $386 million benefit related to a resolution of tax positions.

CEO and Chairman Miles D. White commented on the results, "Abbott delivered another quarter of strong results with ongoing earnings per share up more than 10 percent, despite a challenging economy. There were several product launches across pharmaceuticals, vascular and diagnostics, which will contribute to future growth. In addition, we remain on track to separate into two leading health care companies on January 1, 2013."

Segmental Information

In constant currencies, growth in international markets came in at 4.7% for the quarter, while US operations showed a 3.1% increase in revenues.

In constant currencies, the proprietary pharmaceutical division reported a solid 6.4% increase in revenues to $4.42 billion. Solid growth was also reported in the nutritional business, which was up 6.3% to $1.60 billion. Core laboratory diagnostics revenues were up 7.2% to $854 million. Abbott reported revenue declines in some of its smaller divisions including molecular diagnostics, vascular, diabetes care and medical optics.

Outlook

For the full year of 2012, Abbott is now anticipating adjusted earnings per share to come in between $5.06-$5.08. This is a narrowed forecast compared to an earlier guided $5.00-$5.10 per share.

GAAP net earnings are expected to come in between $3.83-$3.85 per share.

Valuation

Abbott did not provide a consolidated balance sheet with its third quarter results. Therefore I take a look at the end of the second quarter when the company held $11.0 billion in cash, equivalents and short term investments. The company operates with $18.1 billion in short and long term debt for a net debt position of $7.1 billion.

For the first nine months of 2012, Abbott generated $29.0 billion in revenues. The firm net earned $4.9 billion, or $3.06 per share under GAAP rules. Full year revenues are expected to come in at $39 billion, while net earnings are expected to reach $6.2 billion, of $3.84 per share.

After last week's drop, the market values the firm at $104 billion. This values the firm at 2.7 times annual revenues and 17 times annual earnings.

Currently, Abbott Laboratories pays a quarterly dividend of $0.51 per share, for an annual dividend yield of 3.1%.

Investment Thesis

Year to date, share of Abbott have risen some 18%. Shares started the year around the $55 mark and steadily rose to year highs of $72 in recent weeks. The correction over the past week send shares back to $66 per share.

Over the past five years, shares have risen some 30%. Shares moved between $40-$60 for most of the period before breaking out towards the upside this summer. Between 2008 and 2012, Abbott grew its annual revenues from $29.5 billion in 2008 to an expected $39 billion in 2012. Net income rose from $4.9 billion to an estimated $6.2 billion, in the meantime.

Abbott seems to be on track for another solid year. Key will be the split up in two companies, still expected to occur on January 1th, 2013. The split was already announced at the end of 2011, and will create two new companies. Abbott Laboratories will be the medical device company, continuing with all activities besides the proprietary pharmaceuticals division. AbbVie will continue with the proprietary pharmaceutical activities. At its current rate, AbbVie will generate annual revenues of approximately $18 billion, while Abbott Laboratories will generate revenues of $21 billion.

Many other large US companies have already split up this year. ConocoPhillips continued as Conoco (COP) and Phillips 66 (PSX). Other recent split-up include Tyco International (TYC), Kraft Foods (KFT) and ITT International (ITT).

Under its current form, Abbott has a lot of divisions which gives the impression that the company has diversified operations. However, roughly $8 billion of the proprietary pharmaceutical division's annual revenues of $18 billion is generated by top drug Humira.

Humira, which focuses on rheumatoid arthritis, is rapidly facing competitive pressures from Pfizer (PFE), among others, putting pressure on the value of the entire company. While these pressures could undoubtedly have an impact on the value of AbbVie, the impact on Abbott Laboratories should be close to none after the spin-off.

The market has reacted quite favorable to spin-offs lately. Let's have a renewed look at Abbott, when the exact terms of the split-off have been announced. Overall, the valuation looks reasonably appealing for a pharmaceutical company at 17 times earnings, which pays a 3.1% dividend yield. With both companies being valued as "pure-plays" the market overhang of concerns of Humira would no longer weigh on the valuation of the medical devices business, which could possibly unlock some more value.

Source: Abbott Laboratories - Company Spin-Off Could Unlock Value For Shareholders