Abbott Labs (NYSE:ABT) has always been a little different as a medical technology company, with a history of zigging when other companies zag. For now, that somewhat contrarian philosophy is paying off, as Abbott is one of the very few large-cap medical technology companies to be showing any meaningful growth.

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The Quarter That Was
Abbott came through with 12% revenue growth in the third quarter (or 13% if foreign currency effects are reversed). Pharmaceuticals is still overwhelmingly the largest business at Abbott, and this unit grew more than 23% due in large part to the acquisition of Solvay. Without this deal, growth was probably in the very low single-digits. Elsewhere, the nutritional business was disappointing (down more than 2%) due to a recall, while the diagnostics business was basically on target (up about 2%), and the vascular business was strong (up almost 20%).

On an adjusted basis, the company also delivered strong profitability. Gross margin (again, adjusted) rose 4.5 points to almost 62%, while adjusted earnings grew about 14% for the quarter.

The Road Ahead
Abbott has spent a lot of its history as a med-tech chameleon - often a just a bit below the radar of most investors and willing to change its business model in anticipation of future market developments. For instance, the analyst community was not necessarily overjoyed about the company's decision to expand into drug-coated stents years ago, but now Abbott is the player with all of the momentum in that lucrative niche, and Boston Scientific (NYSE:BSX) and Medtronic (NYSE:MDT) are on their heels. Likewise, while Beckman Coulter (NYSE:BEC), Roche (Nasdaq:RHHBY) and Becton Dickinson (NYSE:BDX) are all involved in molecular diagnostics, Abbott may steal the march on them.

Looking ahead, it would seem that Abbott is where it needs to be with its pharmaceutical business. The company has established a foothold in generics, following the lead of major players like Novartis (NYSE:NVS), and has a solid emerging pipeline in oncology and neurology. So while there is some threat to the company's immunology business from Pfizer (NYSE:PFE) and Incyte (Nasdaq:INCY), Abbott does not seem to need to do a deal - and given the FDA's attitude to new drug approvals, Abbott might be better-shielded from competitors than the market expects. (For more, see Top-Heavy Pharmaceuticals.)

If Abbott needs to do anything, it may be in the diagnostics and device franchises. An acquisition or two (like, say, of Cepheid (Nasdaq:CPHD)) could accelerate the development time lines, and the company has the luxury of cherry-picking promising areas of medical devices for future growth.

The Bottom Line
Although Abbott's stock is closer to its high than its low, the stock has actually been an underperformer relative to the S&P 500. As a strong candidate for best-of-breed within healthcare, though, it could be due for some appreciation. The stock is not necessarily cheap by fundamental indicators like EV/revenue or EV/EBITDA (or P/E-based metrics), but looks about 30% undervalued by cash flow. Abbott's stock is not likely to ever be scintillating, and the company will make moves that leave people scratching their heads in the short term, but this could be a long-term winner for patient investors. (For more, see The Characteristics Of A Successful Company.)

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