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.

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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.)

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