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.
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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.
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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.
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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.