Sometimes investors have to hold their noses a bit to take advantage of mispricings in the market. Abbott Labs (NYSE:ABT) is a good case in point; the company has changed its reporting by classifying its businesses into three meaningless categories, it makes rampant use of "one-time" charges, and the growth profile is heavily overweight to a small number of products.

TUTORIAL: Investing Concepts

Still, cash flow is cash flow, and Abbott produces quite a lot of it, even though the Street does not seem all too willing to value it as highly as the cash flow from other medical technology names. (For more, see 5 Stocks With Solid Cash Flow.)

After Some Digging, a Solid Quarter
Abbott's first quarter results require a little digging and reinterpretation, but the numbers ultimately look pretty good. Reported revenue was up more than 17%, while organic revenue growth was more on the order of 5% to 6%. Growth was led again by the pharmaceutical business, which grew 24% this quarter. Vascular posted a decent result as well (up 13%), while diagnostics and nutrition both contributed high single-digit growth.

Likewise, the profitability side of the ledger was a bit murky, but the underlying results are solid. Gross profit improved more than a point from a year ago and would have been even better if not for the impact of foreign currency on the results. Moving along, Abbott continued its roughly eight-year tradition of "one time" items in the income statement, but operating income still grew around 13%. Stripping everything out and looking at a decidedly "home brew" organic EPS, Abbott's bottom line profitability increased at about the same rate as its organic sales - that is, mid-single-digits.

Unbalanced Growth Could Be an Issue Later
Excluding the impact of the acquisitions of Solvay and Piramal, it is clear that a large percentage (roughly three-quarters) of Abbott's growth is coming from just two products - Humira and drug-coated stents. Both are still growing well; Humira was up 18% worldwide, and stents were up 15%, but both have upcoming challengers.

Humira's growth could be compromised by the eventual launch of oral JAK3 drugs (including one from Pfizer (NYSE:PFE), while the drug-coated stent business should see new launches from Boston Scientific (NYSE:BSX), Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT) in the near future.

The bear scenario will see those new products chip away at these growth drivers and stall out Abbott's growth almost entirely. On the flipside, the JAK3 data is not quite living up to all of its hype, and Abbott is pushing for expanded labeling on Humira. Similarly, the drug-coated stent may not be quite as vulnerable as the skeptics think, as Abbott does have its own pipeline of products as well.

Noise and a Lumpy Pipeline
As previously mentioned, Abbott has chosen to recategorize its reporting into three all but meaningless segments. Instead of straightforward categories like "pharmaceuticals", investors will now be treated to "durable growth", "proprietary pharmaceuticals" and "innovation-driven devices". Though I do not want to make too much of this, this is the sort of silly hand-waving that sometimes unnerves me when it comes to evaluating a management team. At least it looks as though investors will still be able to reconstruct the old categories, and the release of more data on the company's emerging markets exposure is welcome.

Elsewhere, the company's pipeline is looking a bit lumpy. There are compounds in the hopper for cancer and Hep C in 2014, but not a lot in the meantime. Perhaps that makes Abbott a candidate for a little more shopping or in-licensing, though management may feel that the introduction of a Parkinson's drug in 2012 and an endometriosis drug in 2013, partnered with Neurocrine Biosciences (Nasdaq:NBIX), is sufficient, assuming both get approval.

The Bottom Line
Abbott shares may suffer a bit if more, investors believe that Johnson & Johnson has turned a corner. That said, JNJ looks more like a false dawn than a turnaround, and Abbott seems to have a pretty compelling long-term valuation today. It is impossible to excuse all of management's questionable moves, but investors willing to put up with a little noise may have a real bargain here. (For more, see Pharmaceutical Phenoms: America's Best-Selling Medicines.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center