Abbott Continues Growth On Diagnostics Sales And Margin Improvement

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Abbott’s (NYSE:ABT) Q3 results are a good example of the benefits of diversification. Nutritionals, the company’s largest segment, is currently ailing from a sales disruption in some key emerging markets. However, the company reported a 4.3% year-on-year increase in operational sales as some other divisions picked up the slack. The most noticeable growth came from Diagnostics, Abbott’s second largest business division, which grew by an impressive 10.5%.

The company also did well on the cost side as gross margins increased by 1.6% over the past year with continued improvements in the Nutritionals and Diagnostics businesses. Adjusted operating margins improved by 210 basis points due to a sharp decline in SG&A expenses. ((Abbott Reports Third-Quarter 2013 Results, Abbott Labs, October 16, 2013))

We currently have a price estimate of almost $40 for Abbott’s stock, and this is likely to change slightly once we revise our forecasts based on data released in this earnings call.

See our full analysis for Abbott Labs

Nutritionals Business Suffered Due To Product Recalls

Last quarter Abbott was asked by regulators in China, Vietnam and Saudi Arabia to recall some of its baby formula products on concerns that they contained bacteria that cause food poisoning. [1] [2] [3] Although no health issues were detected during later investigations, Abbott claims that the recalls caused significant disruption to its sales in these countries and shaved off its total worldwide revenue growth by nearly 2%. It expects sales to remain impacted on this account until the middle of 2014, and is making additional marketing investments in these countries to revive sales. [4]

We expect the impact of these recalls to fade in the next few quarters as Abbott’s marketing initiatives bear fruit. Thereafter, the company should start gaining market share again at a healthy rate as it launches new products and expands its geographical presence.

Diagnostics Business Compensated For Weakness

Diagnostics is one of Abbott’s fastest growing business divisions: worldwide sales in this segment grew by 10.5% in Q3 on an operational basis, driven almost equally by Molecular Diagnostics (16%) and Point-of-Care Diagnostics (17%), and to a lesser extent by Core Laboratory Diagnostics (9%).

The growth in Molecular Diagnostics was driven by a higher incidence of infectious diseases and strong demand from emerging markets. Some recent tender wins in Brazil, Russia and Africa also supported these products sales. [5]

In Point-of-Care Diagnostics, growth was essentially driven by the U.S. hospital and Physician Office Lab segments. The future of these products in emerging markets seems to be bright as Abbott has been trying to increase its penetration in key growth markets. In the Core Laboratory Diagnostics segment, sales increased due to strong demand from the U.S. as well as emerging markets. In the U.S., several large health system customers selected Abbott’s solutions to improve operational efficiencies and manage large volumes of tests.

We expect Abbott’s Diagnostics sales to continue increasing over the next few years as it launches innovative Diagnostic products. It is currently developing multiple Diagnostics platforms designed to improve customer service, reduce costs and enhance laboratory productivity. ((Abbott Reports Third-Quarter 2013 Results, Abbott Labs, October 16, 2013))

The Company Is Also Doing Well In Controlling Costs

Abbott is also doing well in controlling costs while it is in the expansion mode. The company’s gross margin for Q3 was around 54%, an increase of 1.6% over the same period last year. Similarly, adjusted operating margins improved by 210 basis points due to a sharp decline in SG&A expenses.

The increase in margins is a result of Abbott’s continued focus on making its operations more efficient. It has been working on improving production scale and yields, reducing materials costs and improving its product mix. It has also taken some astute cost cutting measures such as building new facilities closer to customers in emerging markets to cut distribution costs.

Due to the initiatives mentioned above, we expect Abbott’s margins will continue to grow over the next few years.

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Notes:
  1. China Asks Abbott to Recall Some Formula Products, WSJ, August 5, 2013 []
  2. Vietnam recalls Abbott milk over contamination suspicion, Tuoi Tre News, August 5, 2013 []
  3. Abbott recalls 9 batches of baby formula in Saudi Arabia, CNTV, August 7, 2013 []
  4. Abbott Reports Third-Quarter 2013 Results, Abbott Labs, October 16, 2013 []
  5. Abbott’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, SeekingAlpha, October 16, 2013 []