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Investment Overview for Abbott Labs (NYSE:ABT)
Below are some key drivers of Abbott's value that present opportunities for upside or downside to the current Trefis price estimate:
- Nutritionals Market share:
The Global Nutritionals market is growing rapidly due to increasing demand from emerging markets and Abbott is working to capture a larger share of this growth by increasing its footprint in countries like China, India and Singapore. We currently forecast the company's market share in the Nutritionals segment to decrease from 1.9% in 2013 to around 1.7% by the end of our forecast period. However, if the company's new products take off more than expected in these markets and its market share increases to 2.2%, there could be a 6% upside to our price estimate.
- Abbott's Gross Margin:
Abbott's Gross Profit Margin increased from 46.9% in 2010 to 55.5% in 2013. We forecast the figure to gradually reach 57% by the end of our forecast period as the company remains focused on cost reductions across its business segments. However, if intense competition from new entrants forces the company to reduce the prices and the company’s profit margin declines by 2% in the process, then this represents a 9%-10% downside to our price estimate.
Established in 1888, Abbott Labs is a diversified healthcare conglomerate with a global presence. The firm operates in four main segments: Nutritionals, Diagnostic, Vascular and Generic Pharmaceuticals. It also has a portfolio of diabetes products and medical optics. We treat this as the fifth segment within the firm.
The nutritional segment includes pediatric, adult, healthy living and sports nutrition products such as infant formulas, snack bars and meal replacement shakes.
The diagnostics segment includes systems and tests used for screening for drugs of abuse, cancer, therapeutic drug monitoring, fertility, physiological diseases and infectious diseases such as hepatitis and HIV.
The vascular segment includes minimally invasive medical devices for heart diseases, strokes, carotid artery diseases, and other serious vascular conditions.
The generic pharmaceuticals segment includes a broad line of generic drugs that are manufactured worlwide and sold outside the U.S.
Expansion in emerging markets to drive growth
Today, more than 40% of Abbott’s sales come from emerging markets and we expect this figure to increase to around 50% by 2015. Abbott's management has reiterated its intention to tap these high potential emerging markets. In recent years, Abbott has made significant moves to expand its presence and product portfolio in many of the most populous and fastest-growing countries in the world.
Strong brand recognition and continued investment in product pipeline
Abbott is a market leader in several product categories and continues to leverage its brand to launch new products. The number of new products launched annually has increased five-fold since 2008 on the back of the company's investments in R&D (as well as acquisitions). Both both clinical trials and patent applications have increased 10-fold in the same time.
In 2012, the company was able to expand operating margins by 240 basis points and the company further improved the figure by 10 basis points in 2013. Management believes that they can improve their profit margins to 20% by 2015.
Rapidly growing emerging markets
Per capita income levels in many emerging markets are rising rapidly, which provides an immense opportunity for growth in these markets. Also, new studies and increased access to information have led to rising health consciousness in these markets. However, some emerging markets have patent law issues, which could ultimately limit the growth.
Aging population in the developed world
The average age of the adult population across the developed world is increasing. As the population gets older, demand for adult nutrition products and diagnostics increases. This should positively impact Abbott's revenue.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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