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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a... More
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  • Abbott Laboratories (ABT) quick review - ABT could soon be interesting! 0 comments
    Sep 24, 2010 6:29 PM | about stocks: ABT


    Abbott is currently trading at $50.5 and was added to the pipeline based on its wide-moat 5 star rating from Morningstar.

     1- Business Performance Risk



    FCF / Sales

    Last twelve months (“LTM”): 23%, which is high compared to ABT’s 13-20% performance over the last 10 years


    LTM: 27%, il line with the 20-30% performance over the last 10 years, except for 2 “bad years” with a performance of 12% and 18%.


    LTM: 10.5%; historically ABT’s performance has varied within a 8-12% with a low year at 5%

    Revenue Growth

    Revenue growth on a 5 to 10 year basis has been fairly consitent at 8 to 9%.  Last year was lower but ABT’s last quarter is already counterbalancing this lower performace

    Cash distribution to shareholders

    ABT’s dividend yield is at 3.3% with a consistent payout of ~50%.  The company does very little buybacks and has been acquisitive in the past.

    ABT has been able to deliver consistent and interesting growth, FCF and ROE over the last 10 years. However the company’s ROA is lower than what I would be looking for. The difference between the ROE and ROA indicates that the company has a somewhat high level of debt compared to equity.

    The dividend yield is interesting but overall returns may not be that high if all we get is 3.3% dividend and a (conservative) 5-6% growth.


    2- Balance Sheet Risk



    LT Debt / Equity

    LTM: 0.7x, on the higher end of last 10 years history of 0.2x to 0.5x. The company also carries a fair amount of short term debt which makes the total Debt/Equity ratio exceed 1.0x

    Current Ratio

    1.4x, in line with the histrorical range of 1.0x to 1.8x

    As revealed by our analysis of ROE vs. ROA earlier, ABT carries a large amount of debt (Total debt > Equity) which is probably too high for me. 


    3- Valuation Risk



    Cash Return

    8.3%, making ABT potentially attractive on a cash basis


    14.7x, which is higher than the industry overall and the S&P 500. but also significantly lower than ABT’s 5-year average of ~24x

    ABT’s valuation has been coming down in recent years and is still above the P/E of the market.  ABT’s P/E is higher than the industry but that can easily be explained by ABT’s better diversification and relatively lower “patent risk” vs. a number of its peears.

    On a cash basis, ABT appears attractive however we know that the company’s recent FCF/sales has been higher than usual by 20-30%, making a “normalized” cash return potentially much less attractive!



    I will pass on ABT for now but will keep an active eye on it in my watchlist. The company has been generating good levels of cash flow and ROE over the last 10 years. However I am currently a bit concerned by the level of debt and the sustainability of the current high cash flow. To be comfortable with the stock and proceed to a more in-depth Company analysis, I would want ABT’s Total Debt/Equity to come under 1.0x and/or a confirmation that new FCF/sales level are sustained and/or a drop in price to ~$45 or below.


    Disclosure: No position
    Stocks: ABT
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