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Abbott Labs Well Positioned For Success In 2015


Abbott Laboratories (NYSE:ABT)

Abbott Laboratories is a leading pharmaceutical medical devices and diagnostics company with contribution from four major business segments. These segments include medical devices, drugs, diagnostics and nutritionals. The company’s five-year price to volume performance can be seen below. Since splitting with AbbVie, the company has been able to create growth and continue to increase their dividend.

Recent Fundamental Highlights (FY end Dec)

CEO Miles White took over the company in 1999 and has been consistently reshaping the product portfolio in pursuit of creating a durable business in the long-term. Some of his notable moves include:

  1. Acquisition of Knoll, BASF’s pharma unit in 2001 for $6.9B, that ended up creating $2B in sales and the blockbuster drug Humira
  2. Spinning off the slower growth and low margin hospital products business in 2004
  3. Strengthening the medial devices portfolio with the acquisition of TheraSense (diabetes) in 2004, Guidant’s vascular business in 2006, and Advanced Medical Optics in 2009
  4. Establishing the branded generics business through the acquisition of Piramal and Solvay in 2010.
  5. Spinning off of the proprietary pharmaceuticals business as AbbVie at year-end 2012.

These strong moves show the ability of management to find creative ways for the company to continue to fund long-term growth and should give investors confidence in the long-term prospects of the stock and dividends.

In terms of 3Q14, ABT saw notable growth acceleration in key businesses including EPD and Nutritionals while driving continued positive operating leverage. Based on the healthy performance in the recent quarter, management has raised the mid-point of its full year 2014 EPS guidance from $2.19-$2.29 to $2.25-$2.27. This marks a strong earnings growth of 11%-12% for 2014.

Outlook

Abbott Laboratories’ strategic initiatives have begun paying off as the company delivered an overall robust performance in the third quarter of 2014. In addition to its improving top line, ABT is likely to generate sufficient operating leverage and cash flow to generate a double digit EPS growth.

The acquisition of Veropharm, recently announced by ABT, is expected to close by the end of the year, which, will position the company among the top five branded generics companies in Russia by providing it with in-country manufacturing and a broad portfolio well aligned to the company’s therapeutic areas of focus. Similar to past strategic moves, this one appears as if it will help the company to continue to growth their top and bottom lines.

ABT expects to return to a high-single digit operational sales growth in Nutrition in CY14 and this segment recorded a growth of 10% y/y in the previous 3Q. Hence, its operational sales growth for the 9 months ending CY14 stood at 3.7% y/y, as the impact of the supplier recall continues to fade away. These positive trends are expected to continue into 2015 and will be one of the main catalysts for the company.

Furthermore, the company is expecting a large amount of its growth to come from emerging markets. They expect these markets to contribute nearly half of the Nutritional segments total sales by the end of 2014. These main regions include the BRIC countries, which, according to IMS Health are expected to have a compound annual growth rate of 11%-14% in the next five years.

Economic Moat Trend

Following the divesture of the developed business, Abbott’s EPD (established pharma division) business will exclusively focus on emerging markets and branded generics, which should help stabilize the company’s net profit margin.

Nutritionals have always been a core part of the company’s business, but will be crucial in the coming year in helping the company maintain its competitive advantage. In 2013, this segment accounted for $6740M in sales with margins of approximately 20%. This fast growing segment, as seen below, will help drive up the company’s margins.

Major Risks

  1. Potential for slowing end-market growth, and/or increasing competition for major products, including Abbott’s Xience DES (4% of current sales)
  2. Product recalls or manufacturing warning letters that could push operating costs higher and hinder sales growth
  3. Successful pipeline execution, which will be key to Abbott’s growth. Additionally, product approvability and timing of approvals has become increasingly uncertain in today’s challenging regulatory environment
  4. Successful execution on margin expansion opportunities in an environment of increasing price pressure

Investment Rationale

Abbott’s management team continues to reshape the company for durable growth with a strong balance sheet holding $5.7B of cash and equivalents with only $1.5B in debt.

ABT currently trades at $45.85 (closing price as of Dec 26th) and provides upside over the medium to long-term as management now seems clearly focused on reaccelerating growth through improving execution and investing in new technologies and geographies via M&A.

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