What’s The Upside For Abbott From $85?

by Trefis Team
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Abbott Labs
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Abbott’s (NYSE: ABT) stock declined a mere 1.3% from $86 in the beginning of this year to $85 on April 13, compared to a 15% decline for the broader S&P 500. While Abbott’s stock has outperformed thus far, we believe there is only a limited upside from the current levels. The key is Abbott’s stock is up 56% since the start of 2018, a little over two years ago, and after seeing slight decline in March 2020, given the current coronavirus crisis, and its impact on the global economy, Abbott’s stock has already recovered to pre-crisis levels. Our dashboard, ‘What Factors Drove 56% Change In Abbott’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price gain over the past two years can primarily be attributed to steady revenue and earnings growth for the company. Abbott’s revenues were up 16.5% from 2017 to 2019. This combined with a 6x jump in net income margin from (a depressed) 1.7% in 2017 to 11.6% in 2019, helped earnings per share swell 667% (from low levels). Note that these numbers are based on Abbott’s GAAP numbers. The reason for the low margin in 2017 was tax provisions of $1.9 billion, as compared to $0.3 billion in the prior year. This can be attributed to the impact of changes in the U.S. tax laws. This led to lower EPS in 2017, thus swelling the EPS growth. For comparison, on an adjusted basis, Abbott’s EPS grew only 30% between 2017 and 2019.

A sizable drop in Abbott’s P/E multiple (back to more normalized levels) has largely mitigated the rise in the company’s earnings. Abbott’s P/E multiple dropped from 203x (again due to the changes in tax law, GAAP EPS figure was low, thus swelling the P/E ratio) at the end of 2017 to 41.8x by the end of 2019. Moreover, Abbott’s P/E is down to about 41.3x now, given the volatility of the current situation. This reflects an 80% decrease in P/E multiple since December 2017. We believe there is a limited upside for Abbott’s multiple when compared to levels seen over recent years – P/E of 42x at the end of 2019, and 41x currently.

How Is Coronavirus Impacting Abbott’s Stock

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely impact medical device companies, such as Abbott, as it faces supply chain disruptions, and potential impact on direct sales due to postponement of minor health related issues and surgeries. Between January 31st and March 31st, Abbott stock has lost close to 10% of its value (vs. about a 20% decline in the S&P 500). A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.

While Abbott is geographically well diversified, the U.S. still accounts for over one-third of its revenues, which has become the new epicenter of the outbreak, with the country recording the largest numbers of COVID-19 cases across the globe. The outperformance of Abbott stock in the current crisis can partly be attributed to its work on the new point-of-care testing device, which can produce positive results in 5 minutes. Separately, the company also supplied a million lab test kits for its m2000 RealTime system, that is available in hospitals and molecular laboratories in the U.S., though most of the test kits are lying unused currently due to capacity issues with the labs across the U.S.

Despite the company’s supply for COVID-19 tests, revenues in the near term are likely to be impacted by the ongoing crisis. We believe Abbott’s Q1 results on April 16 will confirm the trend in revenues. It is also likely to accompany lower guidance for the full year. Going by our valuation dashboard for Abbott, we believe that the company’s stock has a limited upside potential from the current levels.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

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