Dark Cloud And Silver Linings: Abbott Q3’16 Earnings

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ABT: Abbott Laboratories logo
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Abbott Laboratories

Abbott Labs (NYSE: ABT) reported its Q3’16 earnings on October 19th. The results for the quarter are in some ways a prologue for the next few quarters. The company reported weakness in nutrition business, Abbott’s largest segment. Going forward we expect growth in the segment to remain muted in coming quarters as well. However, Established Pharmaceuticals, Diagnostics and Medical Devices segments continued to post decent growth. The trends in these segments are likely to continue. We expect the company to grow at a low to mid-single digit rate, on account of the existing portfolio of products, over the next couple of quarters.

Our price estimate of $47.50 for Abbott  is under update

What To Expect Going Forward?

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Over the next quarter and in fiscal 2017 we expect Abbott to report weak performance in nutrition business, due to the weaker performance of its pediatric nutrition business. The company appears to be losing market share in China to local label bands. Another, reason is the shift in sales channel to online which Abbott failed to realize sooner. If the company loses 0.5% market share annually over the next 5 years, it could imply close to 15% downside to our current price estimate. However, we expect that Abbott will be able to stabilize its position over the next fiscal year. Although China is a big market for Abbott accounting for close to 10% of nutrition segment’s revenue, the company’s business is diversified geographically. This will help it stabilize challenges in China.

Furthermore, we expect Abbott to post strong performance in diagnostic business on account of new innovative products such as Alinity and i-stat. The segment reported over 5% operational growth for Q3 on year-over-year basis.

Also, diabetes care segment posted growth of over 12% year over year for Q3 on a constant currency basis, on account of the performance of FreeStyle Libre in European market. The company recently got FDA approval for a pro-version in the U.S. and expects the approval for consumer version by early 2017. Once approved in the U.S., the device has the potential to become a strong franchise for Abbott. Furthermore, going into Q4 we expect the vascular segment to post mid-single digit growth which would be led by MitraClip, Absorb and Supera.

We expect the branded pharma business to continue to post strong results. The company is in leading position in growth oriented emerging markets. The division makes up for over 20% to our estimate of Abbott’s valuation.

Brief Summary of Q3 Results

Revenue and adjusted (non-GAAP) EPS growth were on the expected lines. The company reported quarterly sales of $5.3 billion, implying a growth of 4% year over year on operational basis (excluding currency effect). Non-GAAP EPS for the quarter were $0.59, GAAP EPS was negative $0.22 mainly due to the re-valuation of its in equity position in Mylan. Adjusted operating margins improved by 150 basis points year on year on account of lower SG&A expense. Furthermore, the company announced the sale of its medical optics business to Johnson & Johnson for over $4.3 billion in cash (Read: Making Sense Of Abbott’s Sale Of Its Optics Business). Also, the management said that St. Jude’s acquisition is on track to close but the outcome of there Alere acquisition is still uncertain.

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