Abbott Earnings Preview: Nutritionals And Diagnostics Divisions In Focus

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Abbott Labs (NYSE:ABT) is scheduled to release its results for Q3 on October 16. In the previous quarter, the company’s net revenue grew by 4.2% year-over-year on an operational basis as the Nutritionals and Diagnostics registered operational sales growth of 8.4% and 7.6% respectively. Other divisions remained more or less stagnant – Generic Pharmaceutical and Medical Optics sales increased by 0.2% and 2.2% respectively, while Vascular and Diabetics product sales declined by 0.1% and 0.7%. On the cost side, Abbott’s second quarter SG&A and R&D expenses declined by 5.5% and 2.2% year-over-year, even though the company is in an expansion mode.

We expect more of the same in the upcoming earnings release because the company continues to focus on growing sales while remaining mindful of operating expenses. Our current price target for the company is around $40, and we will update our models after the new data is released on October 16.

See our full analysis for Abbott Labs

Nutritionals and Diagnostics To Drive Growth Again

Together, the Nutritionals and Diagnostics divisions account for over 50% of Abbott’s revenue. Both of these divisions have been reporting solid growth in sales due to strong demand from emerging markets. Countries like China, India, Russia and Brazil continue to grow at a faster rate than most developed economies, and have a rapidly growing middle class. McKinsey & Company predicts that the urban-household income in China will double by 2022 and that the majority of its urban consumers will earn between $9,000 and $34,000 annually by that time. [1] As the middle class continues to grow in these markets, people are likely to increase increase their discretionary spending on nutritional products (food supplements) and point-of-care diagnostics.

However, Watch Out For Chinese Sales This Quarter

Abbott’s nutritional business ran into some trouble with Chinese regulators during the last few months. First, it was fined around 77 million Yuan ($12.63 million) for allegedly collaborating with several competitors to fix the prices of its baby formula products in the country. Second, it was asked by China’s national quality watchdog to recall two batches of its infant baby formula products due to concerns that they might contain bacteria that cause food poisoning. [2] [3]

It will be interesting to see if any of these events have had an impact on the company’s nutritional segment’s sales in the country. Currently, we think that both these events are unlikely to have a material impact on the company’s performance. You can read our analysis of these events here: Why Abbott’s Troubles With Chinese Regulators Are Not A Big Deal.


Growth In Other Divisions

Abbott recently made some acquisitions in the Vascular and Medical optics businesses to boost sales in these markets. It bought a stent manufacturer, IDEV Technologies, for $310 million and ophthalmic device company OptiMedica Corporation for $250 million at the beginning of this quarter.  Accordingly, the company may register some growth in these businesses, albeit not all organically.

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Notes:
  1. Mapping China’s middle class, McKinsey & Company, June 2013 []
  2. China fines milk powder makers $110 million for price fixing, Reuters, August 7, 2013 []
  3. China Asks Abbott to Recall Some Formula Products, WSJ, August 5, 2013 []