Abbott Labs (NYSE:ABT) is a diversified health care company that discovers, develops, manufacturers and markets a wide range of medical products and services. ABT will report first quarter earnings this week.

Recent Developments
ABT reported 4th quarter and full year earnings that beat consensus estimates. Although full year earnings were up 1% from the prior year, earnings came in at the high end of company guidance and ahead of the Street. Total sales were flat from 2005.

In the fourth quarter, sales were 2.8% year over year. There was a change in a Boehringer Ingelheim sales agreement which reduced year over year sales. Adjusting for this amended agreement, global sales increased over 14% year over year, driven by strong sales from the acquired Guidant business and Humira and International Nutritionals.

This strong display of sales came despite ABT's action to stop distributing Mobic, Flomax and Micardis for BI. These products represented over $2 billion in sales in 2005.

The company now earns a commission based on U.S. sales of the BI products. This move improved ABT's gross margin by over 500 basis points in 2006; however, the overall net impact was neutral to operating profit. SG&A and R&D costs rose dramatically as a result of the Guidant acquisition. Research and development costs increased to 9% of sales, up from 8.3%, but tax rates also fell to 22.8% from 30%.

Strong Business Segments
Worldwide vascular sales tripled primarily due to the addition of Guidant vascular business. The new launch of the Xact Carotid Stent System in Europe and parts of Asia also helped sales. Sales in nutritionals rose nearly 10% boosted by a near 20% rise in international sales. International demand for Ensure and infant formula is rising.

Pharma Still Weak, But Improvement Ahead
Worldwide pharma sales fell by nearly 10% in 2006; however, adjusting for the BI agreement, it would have risen by about 8%. International sales rose over 5%. Humira led sales growth with an increase of 36% in the U.S. market and 58% in international markets. Sales of the HIV drug Kaletra increased 11% to $1.1 billion -- sales in the United States rose 22% while international sales rose 7% (on constant currency basis). The sales of TriCor (cardiovascular) rose 18% gaining market share in the highly competitive U.S. cholesterol markets.

Some of ABT's products are under pressure from generic competition. For example, Synthroid sales declined 4% and are expected to exceed $400 million in sales in 2007. Ultane/Sevorane sales dropped 9% to $799 million, and sales for the Biaxin franchise fell 23% to $8 million worldwide.

Help from Acquisitions
In December ABT acquired Kos Pharmaceuticals for about $3.8 billion. Kos will bring a portfolio of respiratory and cardiovascular products, and will increase ABT's sales in cardiovascular to around $850 million. New drug-eluting stent products are expected to be launched in 2007. Other launches are expected for 2008 and 2009 as well.

'07 Expectations and Financial Valuations
Guidance from management expects earnings growth to be in the range of 9.5% to 12%, with an estimate of $2.77 to $2.83. Excluding recent acquisitions and divestitures, sales growth is expected to be 13 to 15%. ABT, however, is expected to face tough comparisons in the first half of 2007 as there will be some slight dilution from its recent acquisitions. Street consensus is smack in the middle of management guidance at 52 cents a share.

ABT's balance sheet is strong even after its recent spate of acquisitions. Cash on the balance sheet at year end was around $11.3 billion. Debt to total cap was about 33%. Return on equity however, is a bit weak at 12%. Several quarters of improving earnings and ABT's share buy back program of $2.5 billion should improve ROE. (To learn more, read Breaking Down The Balance Sheet.)

By most measures, ABT is not inexpensive. It has undergone significant restructuring and future, five-year earnings growth is expected to be around 11%. Abbott Labs also pays about a 2.4% dividend yield. The assimilation of its recent acquisitions should help accelerate earnings growth, and ABT seems poised to return to its historic consistent level of double digit growth as many S&P 500 companies begin to see their earnings slip.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  2. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  3. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  4. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  5. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  6. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  7. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  10. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center