Abbott Earnings Preview: Emerging Markets And Profit Margin In Focus

Abbott Laboratories (NYSE:ABT) is scheduled to release its earnings for Q2 2013 on July 17th. In the previous quarter, the company reported that its total revenue was almost $5.4 billion, up 3.5% from the same period last year on an operational basis. The growth was driven primarily by the company’s nutritionals and diagnostics divisions where sales grew by 9% and 6.4% year-over-year respectively. The company’s performance was also solid on the cost side as it was able to reduce total operating expenses by 0.3% year-over-year despite a 3% jump in its COGS. This happened because Abbott remains focused on improving its margins and was able to curtail its R&D and SG&A expenses by 4.8% and 3.1% respectively. ^[1]

We expect continued progress in the upcoming earnings release because the company continues to focus on growing sales while remaining mindful of operating expenses. Our current price target for the company is around $38, and we will revise the number after new data is released on July 17.

See our full analysis for Abbott Labs

Nutritionals and Diagnostics To Drive Growth Again

Nutritionals and diagnostics together account for over 50% of Abbott’s revenue and around 56% of its value according to our estimates. Both of these divisions have lately been reporting solid growth in sales due to strong demand from emerging markets. Countries like China, India, Russia and Brazil continue to grow at a faster rate than most developed economies, and have a rapidly growing middle class. For example, McKinsey & Company predicts that the urban-household income in China will double by 2022 and that the majority of its urban consumers will earn between $9,000 and $34,000 annually by that time. ^[2] As the middle class continues to grow in these markets, people are likely to increase their focus on healthy living and increase their discretionary spending on nutritional products (food supplements) and point-of-care diagnostics.

Abbott knows this and has been preparing to capture a larger market share in these countries. The company already has a strong presence in China with one nutritionals plant in Guangzhou and another one under construction in Jiaxing. ^[3] In India, it recently opened a nutritional R&D center to develop affordable nutrition products for the country’s vast population. In the diagnostics business, it is developing six new platforms across the Core Laboratory, Molecular and Point of Care categories in order to improve service to customers, enhance laboratory productivity, improve efficiency and reduce costs. ^[4] Once launched, these platforms can be expected to increase Abbott’s diagnostics product line worldwide and boost its sales.

Abbott Remains Focused On Driving Margins Higher

While Abbott’s top-line is expected to continue growing, the company is constantly looking to reduce its costs in order to maximize margins. The new manufacturing units that are being built by the company are deliberately located nearer to the markets they are intended to serve. This is likely to reduce Abbott’s distribution and logistics expenses significantly when these plants become operational. Further, these plants are designed to be more efficient and use the latest technology that improves yields and, as a result, margins. The company is also looking into its raw material and packaging material costs in order to improve its gross margins.

On the distribution side, Abbott started selling its products directly to its customers in several of its markets. It recently acquired its distributor in Vietnam, which is its largest nutrition business outside of the U.S. and China, and will from now on reach out to customers directly in this market. We believe that with a focus on reducing logistics costs and by removing middlemen, the company will able to make gradual improvements in its margins going forward.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

1. Abbott Reports First-Quarter 2013 Results, Abbott Labs, April 17, 2013 [↩]
2. Mapping China’s middle class, McKinsey & Company, June 2013 [↩]
3. CHINA: Abbott to open Chinese infant nutrition plant, Just Food, November 14, 2012 [↩]
4. SEC Filings, Abbott Labs, April 17, 2013 [↩]