It has been more than a 100 days since Abbott Laboratories (NYSE:ABT) separated its research-based pharmaceutical business into a newly formed entity named AbbVie Inc (NYSE:ABBV). As is often the case, the spin-off has been the initial winner. AbbVie Inc (NYSE:ABBV) has produced a total return of more than 32% in pretty quick order. Abbott has done well, but the 17% return has clearly not kept pace. AbbVie Inc (NYSE:ABBV) is now a concentrated pure pharmaceutical company with heavy reliance on Humira. The stock will likely do well given the difficulties in a competing firm will have in producing a generic biologic compound to compete with Humira once the patent does expire. However, investors seeking out wide-moat firms should instead turn their attention to Abbott Laboratories (NYSE:ABT).
Abbott Labs is the company that retains wide-moat status and offers a compelling story. The debate is whether this story also comes with an attractive valuation. Should investors buy Abbott Labs today?
Compelling Story
Abbott Laboratories (NYSE:ABT) is now a diversified health care company that is the market leader in each of its segments. This is quite a feat and clearly establishes the company’s wide-moat status. Their four main segments are Nutritionals, Medical Devices, Established Pharmaceuticals, and Diagnostics. The company is well positioned in the growth segments of the health care industry and this is further aided by the fact that emerging markets account for 40% of sales. Emerging market health care penetration is woefully inferior to that of the developed world. This, along with a general aging of the population in the developed world, sets the stage for consistent earnings-per-share growth of 10% of more over the next several years.
Given the diversity of the company, valuing the company on a sum-of-the-parts analysis makes the most sense.
Nutritionals
Nutritionals is the largest business segment at roughly 30% of sales. This division is mainly comprised of infant and adult nutrition. Abbott Laboratories (NYSE:ABT) is the market leader in infant nutrition with their Similac branded infant formula. They have a market share close to 40%. This slightly outpaces Enfamil which is owned by Mead Johnson Nutrition CO (NYSE:MJN). Ensure is the leader in the adult nutrition space. The entire Nutrition division is growing north of 8% on a constant currency basis. There are substantial growth opportunities coming from both the aging population as well as with increasing hospital usage rates for these scientifically proven nutritional formulas.
Mead Johnson Nutrition CO (NYSE:MJN) is the clear comparable here. The pure play nutritional company produces annual sales close to $4 billion compared to more than $20 billion for Abbott. Sales growth is actually slightly lower than Abbott’s Nutrition division, but very consistent and offers a similarly compelling story. From a risk standpoint, Abbott Laboratories (NYSE:ABT) has credit ratings of A+ from Standard & Poor’s whereas Mead Johnson Nutrition CO (NYSE:MJN) is several notches lower at BBB minus. Mead Johnson has a forward price-to-earnings ratio of 24x.
Medical Devices
Medical devices comprise about one-quarter of total sales. The majority of sales come from stents and again the company is the clear global leader. Also supporting this division are solid growth opportunities in blood glucose meters along with cataract and LASIK medical equipment. The comparable in this division is Medtronic, Inc. (NYSE:MDT) who is the number two player in stents and a well-established medical device maker. Growth rates for stents and pace makers have stalled in recent years amid several industry recalls and a notable slowdown in Europe. This has pushed valuations to historic lows in recent years with Medtronic stock currently trading at 13x forward EPS. Medtronic, Inc. (NYSE:MDT) forecast 2013 sales growth of 3-4% and EPS growth of 5-6%.
Abbott Laboratories (NYSE:ABT)’s division should be rated the same at this point in time, but I want to highlight the future potential.
