U.S. markets closed
  • S&P 500

    3,811.15
    -18.19 (-0.48%)
     
  • Dow 30

    30,932.37
    -469.64 (-1.50%)
     
  • Nasdaq

    13,192.35
    +72.92 (+0.56%)
     
  • Russell 2000

    2,201.05
    +0.88 (+0.04%)
     
  • Crude Oil

    61.66
    -1.87 (-2.94%)
     
  • Gold

    1,733.00
    -42.40 (-2.39%)
     
  • Silver

    26.70
    -0.98 (-3.56%)
     
  • EUR/USD

    1.2088
    -0.0099 (-0.81%)
     
  • 10-Yr Bond

    1.4600
    -0.0580 (-3.82%)
     
  • GBP/USD

    1.3921
    -0.0091 (-0.65%)
     
  • USD/JPY

    106.5500
    +0.3200 (+0.30%)
     
  • BTC-USD

    47,179.06
    +1,088.54 (+2.36%)
     
  • CMC Crypto 200

    912.88
    -20.25 (-2.17%)
     
  • FTSE 100

    6,483.43
    -168.53 (-2.53%)
     
  • Nikkei 225

    28,966.01
    -1,202.26 (-3.99%)
     

Abbott Laboratories: The Definition of a Premium Company

  • Oops!
    Something went wrong.
    Please try again later.
GuruFocus.com
·6 min read
  • Oops!
    Something went wrong.
    Please try again later.

- By Nathan Parsh

Abbott Laboratories (NYSE:ABT) recently reported earnings results that easily topped Wall Street analysts' estimates and issued guidance that shows the company is expecting to perform very well in 2021.

Following an over 41% gain over the last year (compared to 16.4% for the S&P 500 Index), shares are expensive based on Abbott Laboratories' guidance for the current year.


Still, I found Abbott Laboratories' quarterly results, guidance and dividend history to add to my position in the company. Here's why.

Recent earnings highlights

Abbott Laboratories reported fourth-quarter and full-year earnings on Jan. 27. For the quarter, revenue of $10.7 billion was a 28.7% increase from the prior year and was $766 million ahead of estimates. Adjusted earnings per share of $1.45 was a 52.6% increase from the prior year and 10 cents better than expected. Adjusted net earnings grew 53.2% to $2.6 billion.

For 2020, revenue grew 8.5% to $34.6 billion. Adjusted earnings grew 12.7% to $3.65 per share and was at the top end of the company's guidance from the beginning of the year. Adjusted net earnings improved 21.9% to $4.5 billion

The difference in growth rates for adjusted earnings per share and net earnings for both the fourth quarter and full year was due to a slightly higher average number of shares outstanding, showing that Abbott Laboratories' didn't rely on share repurchases to improve its adjusted earnings.

Organic topline growth was 28.4% and 9.8% for the quarter and year as nearly all business segments experienced improvements.

Diagnostics was the top perform by far as this segment produced organic growth of 40.6% for 2020, but 108.9% for the quarter. Higher demand for Abbott Laboratories' Covid-19 rapid testing drove gains for this segment as global related sales were $2.4 billion in the fourth quarter. Rapid testing platforms were responsible for $1.9 billion of this total. Rapid Diagnostics grew 329% year over year as the company delivered more than 300 million Covid-19 testing kits in the fourth quarter alone. For the year, Diagnostics demonstrated 40.6% organic growth.

The pandemic was a tailwind to results for the company overall and Diagnostics in particular. Backing out global Covid-19-related revenues, Abbott Laboratories still had nearly 6% revenue growth for the fourth quarter. While the pandemic did contribute to the company's success, Abbott Laboratories showed improvements in most other businesses as well.

Nutrition grew 4.4% in the fourth quarter and 4.7% for the year. Adult revenues were higher by almost 13% due to strength in nutrition brands Ensure and Glucerna. Pediatric fell 2.2% as weaker results in China offset a 5.2% improvement in infant formula brand Similac.

Established Pharmaceuticals, which only conducts business outside of the U.S., grew 3.4% in the fourth quarter and 1.9% for the year. Key emerging markets, which include China, Russia, India and Brazil, were up just over 1% for the quarter due to the impact of Covid-19. Other emerging market regions were higher by almost 11% due to increased demand for Influvac, Abbott Laboratories' flu vaccine.

Medical Devices was the most challenged portion of the company as organic sales fell 0.4% in the fourth quarter. This was a deacceleration from prior quarters, however. For the year, this segment was down almost 4%, which much of the decline due to the postponement or cancelation of elective surgeries related to the Covid-19 pandemic.

Diabetes Care grew more than 29%, primarily on the strength in demand of the company's long-lasting glucose monitor FreeStyle Libre. This product had 37.1% organic growth compared to the prior quarter. Sales for the year were up 50% in the U.S. and 40% in international markets. This device is now used by more than 3 million users.

All other businesses within Medical Devices were weaker than the prior year, mostly due to Covid-19. That doesn't mean all hope is lost. Prior to the pandemic, Abbott Laboratories had experienced excellent growth in this area as Medical Devices was the best-performing segment in 2019, producing organic sales growth of 11.3% that year.

Future gains will be due to ongoing product innovation. For example, the company received approval for its heart device MitraClip G4 last year and has seen impressive demand for its minimally invasive heart-related devices. Abbott Laboratories also expects that the biosensor platform used in its FreeStyle Libre product will have a large variety of future applications, including for athletes and in other non-diabetes areas. Given past success and product pipelines, a return to a more normalized business environment would likely mean a return to growth for Medical Devices.

Abbott Laboratories provided initial guidance for the year, with the expectations that adjusted earnings per share will be at least $5 in 2021. If achieved, this would be a 37% increase from last year and an impressive performance, especially in light of the company's double-digit growth in 2020. Stacked on top of last year's results, Abbott Laboratories expects to grow adjusted earnings per share nearly 50% over two years compared to pre-pandemic results in 2019.

Reviewing the company's fourth-quarter and full-year results helps to understand why shares of Abbott Laboratories have so easily outperformed the S&P 500 index. The company's innovation, such as the FreeStyle Libre and the 15-minute Covid-19 testing platform, results in market-leading products. The pandemic was a significant challenge for Abbott Laboratories' Medical Device segment. Yet the weakness, in what was the company's best performer and highest-grossing business in 2019, was barely a speedbump in the fourth quarter and full year. Even removing Covid-19 testing platform numbers and Abbott Laboratories still would have produced higher revenues from the previous year, which speaks to the strength of the company as a whole.

Final thoughts

Using the current share price of $127 and adjusted earnings per share of $3.65 for 2020, Abbott Laboratories trades with a trailing price-earnings ratio of 34.8. This is a valuation more on par with high growth technology stocks.

On expected adjusted eanings per share for 2021, shares trade with a forward price-earnings ratio of 25.4. The forward earnings multiple is still elevated, but compares more favorably to Abbott Laboratories' price-earnings ratio of 21.1 that the stock has averaged since spinning of AbbVie Inc. (NYSE:ABBV) in 2013.

GuruFocus estimates the stock's intrinsic value at $88.74, which results in a price-to-GF Value of 1.43 today and earns Abbott Laboratories a rating of significantly overvalued.

Abbott Laboratories: The Definition of a Premium Company
Abbott Laboratories: The Definition of a Premium Company

I will not argue that shares are expensive, but Abbott Laboratories is also a Dividend Aristocrat. Its most recent increase of 25% for the Feb. 16 payment has extended the company's dividend growth streak to 49 years. This places Abbott Laboratories one year away from joining the Dividend Kings.

The company's recent earnings results, guidance for the current year, innovation, business model and dividend growth history make Abbott Laboratories an attractive investment even with the valuation.

I added to my position in the company following the earnings release, purchasing shares at $114.41 (at 22.9 times adjusted earnings per share guidance for 2021). I paid a premium for these shares, but Abbott Laboratories has demonstrated over the long term that it a premium company.

Disclosure: The author has a long position in Abbott Laboratories and AbbVie.

Read more here:



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.