Abbott is the first company to develop a stent that over time gradually absorbs into the heart vessel. Metal stents remain behind and have been the cause of many recalls and debate. Trials have been exceedingly positive, but guidance for actual sales and earnings numbers remains difficult. Needless to say, there is plenty of upside in this new technology that could ultimately result in this division should be treated with a premium valuation to Medtronic, Inc. (NYSE:MDT) at some point in the future.
Established Pharmaceuticals
Established Pharmaceuticals account for one-quarter of total sales and is comprised of more than 500 branded generic drugs sold exclusively outside the United States. Once again, the reliance and growth opportunities of emerging markets become evident with 60% of this division selling into these markets. This number is only going higher given that emerging markets are growing 15% annually for the company in this division while developed market sales are shrinking.
There are substantial growth opportunities for health care penetration in the emerging markets. According to Credit Suisse, pharmaceutical spending per capita is over $600 in developed markets compared to just $81 in the BRIC countries. Developed market headwinds persist, but are more than offset by the enormous emerging market potential.
Diagnostics
Diagnostics account for roughly 20% of sales and the bulk of the sales come from the immunoassay and chemistry business that detect diseases and other medical conditions. Abbott holds a number two position in in-vitro diagnostics behind Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY). Worldwide sales increased 6% in the first quarter of 2013, but this division’s earnings are growing faster than sales. The company said they remain on track to improve operating margins to 20% by 2015 compared to less than 10% in 2007.
Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY) is a diversified health care company as well with a sizeable presence in branded pharmaceuticals. Their key drugs of Avastin, Herceptin, and Rituxan are anticipated to show similar growth to that of Abbott’s established pharmaceuticals division in the next several years. All told, the established pharmaceutical and diagnostic divisions should be combined and matched against Roche Holding Ltd. (ADR) (OTCMKTS:RHHBY). Roche trades with limited liquidity on U.S. exchanges, but has a forward price-to-earnings ratio of 16x in its home market of Switzerland.
Putting it all Together
Abbott Lab’s fair value forward price-to-earnings ratio is 19.8x based on sum-of-the-parts valuation. The company is forecast to earn $2 per share in 2013. The simple math puts a fair value stock price at roughly $39.60. This is 8% higher than the current stock quotation. There doesn’t appear to be a lot of home run potential at this juncture. However, the company has strong competitive advantages, trades at a modest discount to fair value, offers great earnings visibility, and has a bit of upside potential from their new stent technology. Even at current prices, the stock makes for a good addition as a core holding in modest to conservative accounts.
The article Building a Stronger Core With Abbott Laboratories originally appeared on Fool.com is written by market8.
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