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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... 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. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. 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 >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. 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 >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!