There's no one right way for a company to report results to investors, but I believe Abbott Laboratories' (NYSE:ABT) reporting is significantly sub-standard given the approaching split into Abbott Laboratories and AbbVie (NYSE:ABBV). Even worse, however, is the apparent state of Abbott Laboratories' business. While I can support the idea that there's room for growth and self-improvement, investors need to realize that Humira hid a lot of defects and that Abbott may not be the top-notch company people generally assumed it was.

SEE: Industry Handbook: Biotechnology

Fourth Quarter Results - or What There Is of Them
For reasons that I simply do not understand, Abbott Laboratories did not provide investors with pro forma results for the fourth quarter that separate the performance of the new Abbott and AbbVie businesses. That leaves investors to draw what they can from the data provided, and it wasn't uniformly positive.

Revenue for the new Abbott increased about 2%, or about 3% adjusting for currency. The company's nutrition business was far and away the leader, with revenue up 10% (and about 30% of the total). The "established pharmaceuticals" business saw sub-1% constant currency growth, while diagnostics was up almost 6% and devices were down about 2%.

As for profits, the lack of pro forma information makes it impossible to say much of anything. Based on prior proxy information (as well as management guidance), it seems reasonable to assume that the company's margins were sub-standard in comparison to its wider comp group. Again, I find this an unacceptable deficiency on the part of management - I understand that the company had to report "unified" GAAP results, but I see no reason why pro forma statements could not have been provided.

SEE: 5 Must-Have Metrics For Value Investors

Question Growth and Profitability in the New Abbott
I expect that many investors were surprised to see how Abbott stacked up against peers when it came to the margins in the businesses to be included in the "new Abbott." Relative to Mead Johnson (NYSE:MJN), Abbott has been tracking about 10 points lower in operating margin and is well below the 20% level that seems normal in the industry. Likewise in diagnostics and devices, where the company comes up short against Becton Dickinson (NYSE:BDX), Roche (OTC:RHHBY), Johnson & Johnson (NYSE:JNJ) and Covidien (NYSE:COV) despite leading market share in most of its chosen businesses.

Abbott management has talked of its plans to improve margins, and many sell-side analysts seem willing to accept them at their word. Growth could be another area of concern, though.

Abbott is strong in "core lab" areas such as immunoassay, but Roche and Siemens (NYSE:SI) have both been stepping up their games, and the sale of Johnson & Johnson's diagnostics unit to a more motivated operator could revive that business as well. In stents, Abbott has a good platform but also fierce competition from Medtronic (NYSE:MDT) and Boston Scientific (NYSE:BSX), and I worry that overall stent market growth is liable to disappoint. While I do think the company's diabetes franchise is solid, I'm not sure that other emerging opportunities like MitraClip can carry the load of investor expectations.

On a more positive note, Abbott has strong emerging market exposure - particularly through its nutrition and established pharmaceutical businesses. While investors may overestimate Abbott's ability to use these businesses to sell through other products, it nevertheless provides a platform.

SEE: The Ups And Downs Of Biotechnology

The Bottom Line
Judging by Abbott's past statements and guidance after this quarter, it looks like margin improvement is going to be a multi-year process. Clearly, the potential to do better is there (and the bottom-line impact would be significant), but I think investors need to at least ask themselves why and how they believe that a company that has underperformed will start to turn that around.

I believe Abbott can grow revenue at more or less the same rate as other diversified med-tech players such as Johnson & Johnson, Covidien, Medtronic and the like - in other words, somewhere in the low-to-mid single digits. That leaves margin improvement as a key driver, and I currently believe that Abbott will improve but still lag this comp group for years to come.

All in all, I see the new Abbott's fair value in the mid-$30s, and I do not believe that the stock is all that compelling today. Abbott does have good products and strong technology, but I have too many questions about management's ability to execute and operate them effectively to be more excited about the shares right now.

At the time of writing, Stephen D. Simpson owned shares of Roche since 2011.

Related Articles
  1. 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.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. 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.
  4. Economics

    Is Wall Street Living in Denial?

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

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

    Is DKS a bargain here?
  6. 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?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... 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. 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 >>
  4. 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 >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center