Currency Headwinds Likely To Affect Abbott’s Profitability In Q4’15, Though Further Margin Improvements To Be Expected

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Abbott Laboratories

Leading medical device maker Abbott Laboratories (NYSE:ABT) is scheduled to report its Q4’15 earnings on January 28th. The company’s revenues in 2015 have been largely affected by currency headwinds throughout the year. However, Abbott saw strong organic growth across all segments as well. For Q4’15, the company has guided to mid-single-digit growth in the sales from the diagnostics, nutritional, and medical optics segments. In contrast, it specifies flat growth in vascular sales and a low double-digit growth in the sales from established pharmaceuticals. Further, the company expects to see an improvement in gross margins in Q4’15. 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.

Our price estimate of $45 for Abbott Laboratories is approximately 10% above the current market price.

See our complete analysis for Abbott Laboratories here

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Currency Exchange Effects Impacting Abbott’s Sales From Markets Outside the U.S

According to management, as relayed in the last conference call, currency headwinds can impact its sales by up to 6.5% in Q4’15. [1] The previous quarter, Q3’15, had been one of the toughest for Abbott from the currency standpoint, as the company reported a negative impact of 9.5% from currency headwinds. A strengthening U.S economy and weakening economic trends in the emerging markets have caused the U.S dollar to strengthen relative to the currencies in other regions. Further, a devaluation of Chinese Yuan to spur exports and thr Fed rate hike in the U.S has strengthened the U.S dollar even more. As Abbott derives a major portion of its sales from emerging markets and Europe, where the currency has been largely weak relative to U.S dollar, the company growth is suffering from these currency effects.

However, the company expects to see strong operational growth excluding currency effects. Moreover, the company saw strong double digit growth in sales in China in Q3’15, despite a slowing economy that has taken a toll on other industries. We believe that Abbott’s strong fundamentals will gradually reflect in its topline when the currency headwinds start to ease.

Abbott Foccussed On Improving Margins

At 57.5%, Abbott’s non-GAAP gross margin expanded by 200 basis points year over year in the third quarter. The improvement was primarily driven by continued margin expansion in the Diagnostics and Nutrition businesses. Abbott guides an improvement of over 100 basis points in the non-GAAP operating margin for the full year 2015. The company expects Q4’15 non-GAAP gross margin to improve further to 59%, bringing the full year figure to 58%.

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. 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. Earnings Transcript Q3’15, Seeking Alpha, October 2015 []