Currency Headwinds Take A Toll On Abbott’s Profitability In Q4: Abbott Earnings

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Leading healthcare conglomerate, Abbott Laboratories (NYSE:ABT) posted weak Q4 2015 results on January 28th.  Weak guidance for 2016, owing to currency headwinds, and lower than expected EPS of $0.62 induced an approximately 10% drop in the stock price. A stronger U.S dollar relative to the currencies in emerging markets, a slowing Chinese economy and a challenging economic environment in Venezuela all together weighed down Abbott’s profitability in Q4. Furthermore, the company expects the currency effects to continue affecting its profitability throughout 2016. The company’s management guided a 10% negative impact due to currency effects for 2016. Nevertheless, 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 25% above the current market price. We are in the process of updating our model in light of the latest events.

See our complete analysis for Abbott Laboratories here

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Quick Snapshot of Abbott’s Q4’15 Earnings:

At $5.1 billion, Abbott’s revenue declined by 3.1% in Q4. The overall sales saw a 8% negative impact of currency effects. The gross margin for the company stood at 58.2% of sales in Q4 and was up by 130 basis points year over year. This improvement was primarily attributed to margin expansions in diagnostics and nutrition segments. R&D as a percentage of sales came in at 7% in Q4, reflecting the company’s investments in various diagnostic platforms. In Q4, Abbott benefited from the U.S legislation that suspended the 2.3% medical device on medical device sales for a period of wo years by the U.S government. The company’s net income and diluted EPS in Q4 were $767 million and $0.62 respectively.

Currency Exchange Effects And A Challenging Macro Environment In Venezuela Will Impact Abbott’s Profitability In 2016

The rapid strengthening of the U.S dollar relative to the currencies of emerging markets (most notably Chinese yuan) has impacted Abbott’s profitability in 2015 on an absolute basis. Also, a challenging macro environment in Venezuela, which has spiked the inflation and created a downward pressure on demand in the region, will negatively impact Abbott’s sales in 2016.

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 the 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.

Furthermore, a decline in oil prices has caused a challenging macro environment in Venezuela, which is primarily an oil driven economy. With an estimated inflation of more than 500% for 2016 and a slow demand and regulations on import, Venezuela is undergoing one of the worst economic crisis. The aforementioned factors together have taken a toll on the sales of Abbott too. The company lowered its guidance for 2016 sales growth rate by approximately 2% due to the ongoing Venezuelan crisis.

However, the company expects to see strong operational growth excluding currency effects. Moreover, the company achieved strong double digit growth in revenues from China in Q4’15, despite a slowing economy that has taken a toll on other industries. Furthermore, the company also claims to have expanded its market share in the region in 2015. Abbott attributed this increase to a strong pediatric nutrition portfolio that is customized to meet local preferences in China. We believe that the company’s strong fundamentals will gradually reflect in its topline when the currency headwinds start to ease.

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