Abbott’s Q3 Results, A Deeper Look: Strong International Growth and Margin Expansion Drove

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Abbott Laboratories

Healthcare conglomerate Abbott Laboratories (NYSE:ABT) posted strong third quarter results in its recent release. [1] The company’s underlying growth remains strong despite reported revenues being hammered by currency headwinds. As expected, a bulk of the growth was derived from double-digit organic revenue expansion in the emerging markets. Abbott’s product pipeline remains robust, which suggests that the revenue growth is sustainable in the near to medium term. Abbott paired international revenue growth with strong improvement in the non-GAAP gross margin in the third quarter, further bolstering its financial strength. We believe that Abbott’s focus on an innovative product pipeline and margin expansion is an encouraging indicator of continued growth in its underlying business. The company still is on the lookout for acquisition opportunities, which may further add to its growth potential.

Abbott Laboratories third quarter performance snapshot:

  • Revenue grew by 1.4% year on year to $5.2 billion (10.9%  excluding the currency impact)
  • Non-GAAP gross margin improved by 200 basis points yoy to 57.5%
  • Non-GAAP diluted EPS from continuing operations were $0.54, at the upper end of the guidance range
  • Guidance for full year 2015 non-GAAP diluted EPS from continuing operations was narrowed down to $2.14 to $2.16.

Our price estimate of $45 for Abbott Laboratories is nearly the same as its current market price.

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See our complete analysis for Abbott Laboratories here

Strong Growth in International Markets Help Offset Weak U.S. Sales

Excluding the impact of currency movements, Abbott’s revenues from international markets expanded by a commendable 15.4% year over year in the third quarter. Currency movements almost completely offset the growth with a 13.8 percentage points drag on international revenue growth. Still, the double digit growth in currency neutral terms strongly points to the strength of Abbott’s underlying business.

The performance in international markets is especially encouraging, considering the ongoing slowdown in a number of major emerging market countries. For instance, revenues from China, which represent 8% of the company’s total sales, grew by double digits across all of Abbott’s divisions. [2] Despite the broad economic slowdown, growth of the healthcare segment has remained steady in most emerging markets, which is a huge beneficial factor for Abbott.

Diagnostics Business Led From The Front in Q3

Diagnostics was the only division which achieved revenue growth in both the U.S. and  international markets in the third quarter. Diagnostics’ U.S revenues expanded by 6.8% year over year, while international revenues grew by 8.3% in currency neutral terms. The growth in Diagnostics’ revenues is being led by the Point of Care Diagnostics segment, which achieved double digit sales growth in the third quarter. The company continued to expand its presence in Point of Care Diagnostics across the globe, which is likely to contribute to future growth of the segment.

Additionally, Abbott has a strong pipeline of new products coming up in the next three to five years. The company considers the breadth and magnitude of the product pipeline to be better than ever before. [2] The regular launch of these new products in the forthcoming years could provide incremental revenues to the company and sustain the double-digit organic revenue growth in the medium term.

Abbott Maintaining Good Balance Between Margin Accretion and Reinvestments

Abbott’s non-GAAP gross margin expanded by 200 basis points yoy and reached 57.5% in the third quarter. The improvement was primarily driven by continued margin expansion in the Diagnostics and Nutrition businesses. Abbott expects the fourth quarter non-GAAP gross margin to improve further to 59%, bringing the full year figure to 58%. [2]

The notable factor here is that the improvement in gross margin is expected to trickle down to the operating margin also, albeit to a lesser extent. Abbott guides an improvement of over 100 basis points in the non-GAAP operating margin for the full year 2015. This is because the benefits from margin accretion initiatives are expected to be partially reinvested back into R&D and SG&A expenses. We believe that the company is maintaining a fine balance between improving the bottom-line and reinvesting savings into R&D for maintaining a robust product pipeline. However, it remains to be seen if the outsized improvement in gross margin is sustainable over the long term.

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Notes:
  1. Abbott Laboratories Investor Relations []
  2. Abbott Laboratories Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 21, 2015 [] [] []