Abbott Laboratories: A Solid Buy In Uncertain Times
Summary
- Abbott has delivered strong share price growth since 2017 supported by steadily growing revenues and net income.
- Like nearly all stocks Abbott's price has dropped sharply owing to the market turmoil related to COVID-19, but signs point to a quick recovery.
- Nicely diversified business model shows growth in nearly every product line with some e.g. diabetes monitoring demonstrating real promise.
- Abbott stock trades at a discount to my estimated fair value price of $100 and can recover faster than wider market - the stock looks a buy.
Investment Thesis
The past month has been a tough period for holders of equity stocks as the market, gripped by coronavirus fears, has dropped by roughly 10%, despite the government cutting interest rates in an attempt to boost investment.
Optimists may see this as a time to pick up stocks at a discount to their usual trading price, but with no clarity over when the current downturn will come to an end and many firms facing long-term disruption to core business functions, the tactic is a risky one. An alternative option is to look for stocks that are currently displaying market resilience and who are ahead of the curve when it comes to potential of a return to growth.
One such stock I have identified is Abbott Laboratories (NYSE:ABT), the manufacturer and distributor of medical products.
Abbott 1 month share price performance vs S&P 500. Source: TradingView.
As we can see from the chart above, Abbott's stock has not been able to escape the downturn, but since hitting its lowest price since June last year ($77), the share price has recovered quickly and was one of only a handful of healthcare sector stocks to gain on Friday.
Abbott 5 year share price performance. Source: TradingView.
Further encouragement can be taken from Abbott's 5 year share price performance. At its current price of $81.74 the stock is trading at a discount to its average price over the past year, which has rarely dropped below $85 and has hit highs above $90. The consistent growth since the beginning of 2017 coupled with management's projections of further 7-8% revenue growth in 2020 suggests that had it not been for macro market issues Abbott would be close to breaking $100 - especially given the 60% uplift in bottom line earnings the company achieved in Q419.
The catalyst for Abbott's sustained period of share price growth can be traced back to the company's January 2017 acquisition of St. Jude Medical, Inc. for $23.6bn which has helped it grow revenues within its medical device segment by 10% and 7.6% in 2018 and 2019 respectively from $10.2bn to $12.3bn, whilst achieving cost synergies that have led to an increase in gross margins from 47.5% in 2017 to 52.5% in 2019.
Although Abbott's growth between 2017 and 2019 has been incremental rather than explosive - revenue has increased at a CAGR of 5% and net profits at a 22% CAGR - it has been enough to increase the share price by 110% since the St Jude's acquisition. The company's current product suite looks strong and diversified with several potential breakout stars including the Freestyle Libre continuous glucose monitoring device, MitraClip, an alternative to heart valve surgery, blood and plasma screening solution Alinity s, and pediatric nutrition range PediaSure.
Abbott's CEO Miles White will hand over the reins to long-time company Executive Robert Ford in March. White is credited with transforming the company during his 21 years in charge, growing its market cap from $75bn to $149bn - the fact that he is appointing a hand-picked successor suggests that there is a long-term continuity plan in place.
In short, Abbott bears all the hallmarks of a long-term hold and the recent drop in share price - through no fault of the company's - makes the stock all the more appealing. The company is already showing signs of returning to share price accretion and its international reach (Abbott makes 64% of net product sales overseas) and brand recognition may find further favour with investors in the current health conscious climate.
In the rest of this article I will look at the company's 4 main divisions in more detail and highlight areas of growth and potential headwinds. By hitting its target of 7-8% organic growth for 2020 the company will achieve a satisfactory GAAP EPS of $2.35 - $2.45 (non-GAAP $3.55 - $3.65) and there is also a higher quarterly dividend payment of $0.36 per share (a 12% increase from 2019) providing a further reason to acquire some Abbott stock at a discounted price, that may not remain discounted for much longer.
Established Pharmaceutical Products
Abbott Established Pharmaceutical Products division performance 2017 - 2019. Source: my table using data from company 2019 10K submission.
Abbott's branded generic pharmaceuticals division is primarily focused on servicing emerging markets, notably China, Brazil, Russia and India. A growing global middle class of 3.2bn people - with 88% of the next billion members expected to originate predominantly from China and India - are demanding better healthcare products. Abbott is an early mover in this space with more than 3,000 employees across 130 countries in this division, although the field is competitive with the likes of Sanofi, Pfizer (PFE) and Novartis (NOVN) also contesting market share.
Abbott supplies products that treat a range of illnesses including gastroenterology, women's health issues, cardiovascular and metabolic, pain and central nervous system and respiratory drugs and vaccines. As we can see from the table above this division is responsible for 14% ($4.5bn) of the company's total sales. Although growth rates of 3.3% in 2018 and 1.4% in 2019 may seem stagnant Abbott says in its 2019 10K submission that, adjusted for foreign exchange, the rates are 7% and 7.3% respectively.
This is also a high margin business with operating margins rising from 19.8% to 20.1% between 2017 and 2019. This segment therefore provides a welcome boost to the company's overall net profit margin which is a little low for my liking, at 11.3%, although it is one of the few criticisms I can level at the company.
Diagnostic Products
Abbott Diagnostic Products division performance 2017 - 2019. Source: my table using data from company 2019 10K submission.
Abbott's diagnostic product division contributes just under one quarter (24.2%) of total sales revenues and is broken down into core laboratory, molecular, point of care and rapid diagnostics.
Core laboratory is the biggest earning division (14.6% of all company revenues), and covers mainly immunoassay, clinical chemistry, hematology, and transfusion. This segment is home to the Alinity family of products, which have chiefly been marketed in Europe but are beginning to make sales in the US. FDA approval has been secured for Alinity s, a blood and plasma screening system which will be expected to lead the US charge. If it can repeat its overseas success domestically, Alinity's product suite ought to be a major source of growth for Abbott.
Alinity also covers molecular diagnostics - a minor segment which has been in decline losing 9% of its sales between 2018 and 2019. The larger rapid diagnostics segment ($2bn sales, 6% of company sales) also experienced a slight year-on-year decline in sales volumes, owing, Abbott says, to lower than expected infectious disease testing sales in Africa. The segment grew nearly 300% between 2018 and 2019, however, contributing to 33% annual diagnostic product sector growth between 2017 and 2018. This is encouraging since it demonstrates that new and innovative products are capable of moving the needle significantly, and Abbott's annual spend on R&D has exceeded $2bn for the past 2 years.
Nutritional Products
Abbott Nutritional Products division performance 2017 - 2019. Source: my table using data from company 2019 10K submission.
Abbott's nutritional products segment contributes 23% of the company's total sales and includes the Similac and Isomil brands for children, Ensure and Pediasure for adults, and numerous brands used for enteral feeding in healthcare institutions.
Gains in this division have been unspectacular - 4.4% and 2.5% in 2018 and 2019 respectively, but again Abbott say that adjusting for foreign exchange sales grew by 4.8% in 2019, buoyed by new products, an aging population, growing global middle class and higher incidence of chronic diseases.
Additionally, sales of adult nutrition products grew by 10% in Q4, driven by the Ensure/Pediasure brand (according to the Q419 earnings call discussion). The company spends less than $200m of its R&D budget on the nutritional products segment, which suggests it is self-sustaining. South East Asia, Latin America, and the US are key markets, with sales in the US recently outperforming.
Medical Devices
Last - but most certainly not least - Abbott's medical devices segment is its largest (38% of all company sales), most diverse and fastest growing segment - and the one that has, in my view, the most potential for rapid growth.
Abbott Medical Devices division performance 2017 - 2019. Source: my table using data from company 2019 10K submission.
To begin with diabetes care, revenues have grown by 36.7% between 2017-18 and by 30.6% between 2018-19, largely thanks to Abbott's Freestyle Libre continuous glucose monitoring (CGM) device.
Diabetes monitoring is an explosive market thanks to the progress of companies, including Dexcom and Medtronic as well as Abbott, towards the "artificial pancreas" - an all in one connected set of devices that can monitor glucose levels and automatically inject insulin using an intravenous pump as and when required, reducing episodes of hypo or hyper glaecemia, and ensuring diabetes sufferers spend more time in the correct range between the two.
Abbott estimates that 2m people worldwide are using its Freestyle Libre device and says sales volumes exceeded $1.8bn in 2019 - a 70% year-on-year increase. That makes the Freestyle Libre the most popular CGM on the market although the competition from the pricier Dexcom G6/7 and Medtronic's Guardian Link and Sensor going forward is likely to be fierce. Abbott received CE mark clearance to market its 2nd generation device - Freestyle Libre 2 - in Europe in 2018 but are still waiting for the FDA to approve the device in the US.
The Freestyle Libre is currently the most popular CGM in the US but Abbott will be sweating over approval for the next generation device with Medtronic and Dexcom ready to hoover up any impatient users waiting to switch to the latest device. Still, once approved, the new device ought to prove a big winner for the company. Abbott has secured reimbursement for Freestyle Libre in most markets, and the product could potentially cover Type 2 diabetes sufferers - opening up a market of 27.8m people.
Besides diabetes, the medical devices segment also includes rhythm management (pacemakers and defibrillators), which generates >$2bn in sales, and is growing sales at nearly 7% per annum, vascular ($2.8bn sales) and structural heart ($1.4bn, 13% growth in 2019).
The MitraClip, designed for the minimally invasive treatment of mitral regurgitation ("MR"), made $700m of sales in 2019 - a year-on-year increase of 70%. In March last year MitraClip was approved by the FDA for a secondary indication of MR which may triple the number of patients who are eligible to use the device - currently, 80,000 people are using MitraClip worldwide. Another trial is now in progress with the goal of widening the market even further.
Conclusion - a long-term hold at a good price with a exciting product potential
By most measures (based on my research) Abbott is a company on an upward trajectory with a capable management team that has created an efficient, well organised and lucrative set of complementary businesses.
The company reported $3.8bn of cash at YE 2019 and total current assets of $15.7bn with current liabilities of $10bn and long-term debt of $16.7bn. To me this suggests that the company makes good use of its cash and doesn't let it simply sit on the balance sheet without being meaningfully employed.
A net profit margin of just 11.6% is a little underwhelming and probably one of the main reasons why the company's shares do not trade higher, given the risk that one or two failing business lines could turn the company into a loss-maker. Personally, however, I see enough potential in its 4 business divisions - and especially within medical devices - for the company to widen these margins in the coming years by selling a higher volume of products at scale whilst cutting loose one or two of its lesser performing product lines.
Foreign exchange is an ongoing risk for a company that makes the majority of its sales overseas, but the company's growing presence in markets such as Brazil, China and India is also exciting thanks to these country's rapidly growing middle classes. The fact that the global population is aging, leading to higher incidences of diseases, and the growing power of technology within healthcare are also trends that play directly into Abbott's hands.
Abbott competes with both larger rivals who have greater resources, and more agile, smaller competitors, which brings the prospect of either making acquisitions, or being acquired, into play, which is another enticing prospect from an investor's perspective.
I do not see too many reasons why Abbott cannot emerge from the current market-wide dip and continue to build its share price towards a price above $100. The company's current PE ratio is 32x, and forward PE (by my calculation) for 2020 is ~27 (14x by 2025 if 8% growth can be maintained).
There may be bolder investment opportunities in the marketplace for those looking to "buy the dip", but for my money Abbott's consistency is attractive, recent share price growth exceptional, and the potential of its tech-enabled monitoring devices could even make the company a break-out success story in 2020/21.
This article was written by
I write about Biotech, Pharma and Healthcare stocks and share investment tips. Find me at my marketplace channel, Haggerston BioHealth - model portfolio + 4 exclusive stock tips every week. I'm on twitter @edmundingham
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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