Abbott Labs Healing Nicely (ABT)

By Edward Stavetski | April 14, 2007 AAA

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.

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