Abbott Labs beat second-quarter earnings on Thursday, but the corporate’s ongoing litigation over its baby formula in addition to lower guidance for the present quarter are dragging shares down. We see the decline as a chance. According to LSEG, revenue for the three months ended June 30 rose 4% yr over yr to $10.38 billion, barely above expectations. On an organic basis, sales rose 9.3% from the identical period last yr (excluding Covid test sales), also beating expectations. Earnings per share rose over 5% to $1.14, beating Wall Street’s estimate of $1.10 per share. Abbott Laboratories Why we own it: Abbott is a high-quality medtech company with rapid growth. The stock is battling two problems: falling Covid test sales and concerns that the adoption of GLP-1 could disrupt its leading continuous glucose monitor. As Abbott’s organic sales growth continues to shine, the market will realize that each concerns are overblown. Competitors: Dexcom and Edwards Lifesciences Weight in Club Portfolio: 2.89% Last Purchase: 05/29/2024 Start: 01/29/2024 Bottom Line This was a great quarter for Abbott. The sell-off is partly a results of ongoing necrotizing enterocolitis (NEC) lawsuits. Plaintiffs claim that Abbott’s infant formula for premature babies utilized in neonatal intensive care units causes a potentially fatal intestinal disease. Abbott argues that its products for premature babies are lifesaving and called the lawsuits baseless. Still, the litigation is a serious detriment to the stock. And there is a probability Abbott will lose the primary case, which began this month. The Missouri court is taken into account plaintiff-friendly. Abbott has already lost greater than $30 billion in market cap since March, far exceeding the quantity of any potential settlement. That makes Thursday’s decline a buying opportunity. The shares are much more attractive once we consider the corporate’s pipeline. Abbott recently received approval for 2 recent over-the-counter continuous glucose monitoring systems — Lingo and Libre Rio — based on the highly successful FreeStyle Libre. The OTC options could also be recent within the United States, but Abbott has been selling market-leading OTC glucose monitoring products internationally for the reason that Libre launched 10 years ago. The FreeStyle Libre itself, which saw 20% organic growth within the quarter, also has loads of room to grow further. In the U.S., there are still a few third of multiple-daily injectors who don’t use a continuous glucose monitor, and in developed markets internationally, that figure is around 50%. In addition, as mentioned within the press release, the corporate announced 10 recent growth opportunities in the primary half of the yr which are still within the R&D pipeline. “We continue to make good progress on our gross margin improvement initiatives and, more importantly, our pipeline remains highly productive and as a result, we are well positioned to deliver strong results for the remainder of the year,” CEO Robert Ford said in his prepared remarks. Abbott’s dovish guidance for the present quarter also looked as if it would weigh on the stock. Investors should as an alternative deal with management’s upward revision to full-year guidance for each organic sales growth and earnings. The combination of Thursday’s strong results and the immediate drop within the share price creates a positive risk-reward ratio. We recognize that upside potential could also be limited until the NEC case is resolved, but current levels provide a great entry point for patient investors. The dividend yield of about 2.2% rewards those investors for his or her patience. We due to this fact reiterate our rating of 1 and our price goal of $130. Forecast In addition to the strong results, management has raised its full-year forecast. The team now expects organic sales growth (excluding Covid tests) within the range of 9.5% to 10%, up from the previous range of 8.5% to 10% and above the midpoint estimate of 9.54%. Management has also raised its earnings per share forecast to $4.61 to $4.71 from $4.55 to $4.70 per share. At a midpoint of $4.66 per share, this goal is above the $4.63 per share that Wall Street was expecting. For the present (third) quarter, Abbott expects earnings in a spread of $1.18 to $1.22 per share, below Wall Street’s midpoint estimate of $1.21 per share. Quarterly Commentary As will be seen from the chart above, companywide results were strong. Outperformance in revenue and earnings was driven by robust organic growth and better-than-expected profitability in each gross margin and pretax profit. Under the hood, results were mixed. However, strength in diagnostics and medical devices greater than offset weakness in nutrition and established pharmaceuticals. On an organic basis, medical device revenues grew 12.1%, followed by established pharmaceuticals (+8.1%) and nutrition (+7.5%). Diagnostics continues to suffer from the decline in Covid testing revenues. However, on an organic basis, revenues grew 5.9%. Medical devices were the most important driver of outperformance. Within the segment, slight declines in diabetes care ($1.648 billion vs. $1.651 billion expected) and vascular ($724 million vs. $727 million expected) were offset by large gains in rhythm management, electrophysiology, heart failure, structural heart disease and neuromodulation. In diabetes care, sales of the FreeStyle Libre glucose monitoring device reached $1.6 billion, up 20.4% organically yr over yr. In diagnostics, a small setback in molecular was greater than offset by strong ends in core lab, point of care and rapid diagnostics. In nutrition, strength in Abbott’s adult line was dragged down by pediatric nutrition. In the post-earnings call with investors, CEO Robert Ford cited growth through double-digit growth in international adult formula and U.S. infant formula, noting that the five-year compound annual growth rate of international adult formula is greater than 10%, reflecting strong execution and “the impact of positive demographic trends driving increasing demand for our Ensure and Glucerna brands.” Regarding the continuing necrotizing enterocolitis (NEC) case, Abbott continues to defend its premature infant formula and breast milk fortifier. Management again took a while to debate the corporate’s stance, noting that plaintiff’s attorneys “are advancing a theory that is without merit or scientific support.” The team added, “The products and their ingredients have been reviewed and deemed safe for use by regulators, who have also reviewed their labels. There was no increase in the NEC rate, meaning these cases did not arise in response to a trend or new information.” It is also important to note that while all drugs have side effects, doctors must decide whether a particular treatment is appropriate, and removing that option has its own consequences. “If these products were no longer available, doctors would be deprived of the vital nutrition needed in the neonatal intensive care unit. This would create a public health crisis that would affect every state in the country,” the team added. Abbott has a strong case, but there is still a chance it could lose the case, so we cannot ignore this overhang. However, the market capitalization lost in recent months due to these litigations far exceeds the amount Abbott would likely pay to settle. There is a disconnect between the stock price and the underlying fundamentals that presents an opportunity for patient investors. (Jim Cramer’s Charitable Trust is long ABT. A full list of stocks can be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after he sends a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim has discussed a stock on television on CNBC, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INFORMATION REGARDING INVESTING CLUB IS SUBJECT TO OUR TERMS OF SERVICE AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY EXISTS AND WILL NOT BE CREATED BY RECEIVING INFORMATION RELATED TO INVESTING CLUB. 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Abbott Chairman and CEO Robert B. Ford delivers a keynote address at CES 2022 at the Venetian Las Vegas in Las Vegas, Nevada on January 6, 2022.
Ethan Miller |
Abbott Labs beat second-quarter earnings on Thursday, but the continuing litigation over the corporate’s baby formula and lower guidance for the present quarter are dragging shares lower. We see the decline as a chance.
