Can Abbott Stay Healthy in the Second Half of 2013?

Abbott Laboratories (NYSE:ABT) announced impressive second quarter earnings last week that beat analysts’ expectations. While domestic sales growth has stagnated in the past several quarters, the company has enjoyed solid revenue growth overseas. It recently acquired two medical device companies to help rejuvenate its sales at home. Is Abbott poised for a profitable 2013? Let’s use our CHEAT SHEET investing framework to decide whether Abbott is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Growth

Abbott announced solid second quarter earnings last week, reporting earnings per share of $0.46, which beat analysts’ estimates by two cents. Sales increased by 4.2 percent from the previous year’s quarter, though total revenues were slightly below the guidance the company had set out. Most notable was the growth in Abbott’s sales to emerging markets, which now represent more than 40 percent of the company’s revenue; these increased 13 percent on a year-over-year basis. The standouts from Abbott’s second quarter were the international performance of its Nutrition and Diagnostics divisions—up 18.4 percent and 9.1 percent for the quarter on a year-over-year basis.

Emerging markets sales needed to be good to make up for lackluster domestic revenue growth in the second quarter. Out of the Nutrition, Diagnostics, and Medical Devices divisions, Diagnostics was the only one that experienced positive revenue growth. Abbott’s Medical Devices division lagged the most, showing a revenue growth decrease of 5.7 percent. The company hopes to fix declining sales with two key acquisitions of medical device companies, IDev Technologies and OptiMedica, for which it paid $560 million. IDev manufactures a peripheral stent for vascular surgeries, and currently has few competitors; OptiMedica manufactures a laser system that is used in cataract surgeries. These niche plays that use developing technologies in the healthcare industry will help bolster domestic sales.

E = Earnings and Revenues are Increasing Year-over-year

Abbott Laboratories has demonstrated strong year-over-year earnings and revenue growth. Abbott reported earnings per share of $3.72 in 2012, up an impressive 23.59% from the previous year’s EPS of $3.01. Additionally, revenues have shown stable growth over the past four years. Revenue growth should continue into 2014 as plant investments in emerging markets begin to impact the top line and will be improve further if Abbott’s medical device acquisitions pan out as expected.

2012-12 2011-12 2010-12 2009-12
Earnings Per Share $3.72 $3.01 $2.96 $3.69
Earnings Growth YoY 23.59% 1.69% -19.78% 18.27%
Revenues (in millions) $39,874 $38,851 $35,167 $30,765
Revenue Growth YoY 2.63% 10.48% 14.31% 4.19%
Operating Margin 20.3 14.8 17.3 20.3

*Data sourced from Morningstar

T = Technicals on the Stock Chart are Solid

Abbott is currently trading at around $36.35, above both its 200-day moving average of $35.38 and its 50-day moving average of $35.84. Abbott has experienced an uptrend in the past year—up around 20 percent in the last 12 months, though slightly lagging behind the S&P 500. The 200-day moving average line has been a pervious level of support for the stock. The stock is trading around 6.6 percent below its 52-week high of $38.77, which it hit on May 22.

Conclusion

Abbott Laboratories has performed well since spinning off successful drug division into a separate company called AbbVie (NYSE:ABBV) at the beginning of the year. The company’s strong emerging markets sales growth in both its Nutrition and Diagnostics divisions should continue in the medium-term. Additionally, the medical device technology that the company has recently acquired for relatively cheap should drive U.S. revenue growth back to respectable levels. With a relatively low price to equity ratio of 14.51 and a modest dividend yielding 1.6 percent, Abbott is a good value. Its investments both at home and abroad in the last year will continue to help the company generate steady revenue and earnings growth. Abbott Laboratories is an OUTPERFORM.

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