New Products, Emerging Markets to Drive Abbott’s Q3 Results

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ABT: Abbott Laboratories logo
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Abbott Laboratories

Abbott Laboratories (NYSE:ABT) is scheduled to report its third quarter results on October 21st. [1] Despite being on the lookout for acquisition opportunities and investors’ insistence for pulling the trigger, [2] the company’s dry streak in the M&A realm continued in the third quarter. Investors will be keen to gain insight into the company’s acquisition strategy and its plans for putting its substantial cash balance to use. In the absence of any acquisitions, Abbott’s third quarter earnings are likely to be driven by new product clearances and growth in the emerging markets. Currency headwinds are expected to have been a significant drag on Abbott’s revenues and margins, perhaps to a larger extent than the first half of the year.

Abbott guided for double digit growth in non-GAAP EPS and revenues in the third quarter, excluding the impact of currency movements. Foreign exchange movements are expected to drag down revenues by over 9 percentage points, resulting in a reported revenue expansion in the low single digits. The company is currently reinvesting cost savings into R&D and SG&A, and as a result margins are expected to remain stable at best. [2]

Our price estimate of $45 for Abbott Laboratories is slightly higher than its current market price.

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New Products, Emerging Markets To Drive Revenue Growth

Abbott has been slowly but steadily expanding its product base in the absence of inorganic growth opportunities. Its Nutritionals business, which accounts for over 30% of the company’s valuation according to our estimates, is a prime example. Earlier this year, Abbott launched the first organic infant formula in China, while in the U.S. it launched the Similac Advance non-GMO pediatric nutritional product. Similarly, in the Diagnostics business, the company received U.S. FDA approval for its Total β-hCG test during the second quarter, and incremental revenues from that may have already started coming in during the third quarter. [2]

The other key factor behind Abbott’s steady organic revenue growth is its performance in emerging markets. Its Diagnostics business, which has been expanding at a high single-digit clip in recent quarters, owes its growth to double-digit expansion in emerging markets. The combination of new clearances and growth led by emerging markets is present across the board in each of Abbott’s divisions. This trend likely continued in the third quarter.

Investors Looking For Something More

Given Abbott’s past acquisition-heavy strategy, investors have been somewhat unnerved by the lack of M&A activity in the current fiscal year. Management has previously indicated that it is interested in pursuing acquisitions despite the prevalent high valuations in the med-tech industry. Still, it appears that the company is being cautious about where it deploys its surplus cash. Its strategy with respect to the Mylan investment remains unchanged, and the company continues to view it as a relatively short-term investment. Abbott has also denied that it is holding back on investments until the U.S. med-tech tax holiday potentially comes into effect by the end of the current calendar year.

Nevertheless, investors will be keen to gain further insight into the company’s M&A strategy. So far this year, Abbott has been utilizing the cash to comfortably pay out dividends amounting to 40-45% of EPS and steadily buy back shares. However, the question remains if Abbott may be missing out on growth opportunities by holding back on potential acquisitions.

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Notes:
  1. Abbott Laboratories Investor Relations []
  2. Abbott Laboratories Fiscal 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, July 22, 2015 [] [] []