Despite 60% Rally Abbott Stock Still Has Room To Grow

Abbott’s stock (NYSE: ABT) lost more than 27% – dropping from $87 at the beginning of the year to below $63 in late March – then spiked 58% to around $100 now. That means it is well above the levels where it started the year.

Why? Abbott secured regulatory approval for Covid-19 testing as early as March, and it has shipped over 5 million point-of-care tests, over 4 million molecular lab tests, and over 12 million antibody tests in the US, thus far in 2020. Additionally, while the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. In addition, the company posted a better than expected Q2, led by steady growth in its Diagnostics business.

But is this all there is to the story?

Not quite. Despite the recent rally, Trefis estimates Abbott’s Valuation at about $110 per share, roughly 10% above the current market price based on two key opportunities.

The first opportunity we see is to Abbott’s Revenue growth over the coming years. With the economies gradually opening up and lockdown restrictions being lifted in several cities, the healthcare institutions have begun attending to elective surgeries, which were deferred earlier. This means a gradual increase in hospital visits, number of procedures performed, and higher number of prescriptions issued, boding well for Abbott’s Medical Devices, Diagnostics, as well as Established Pharmaceuticals business. The company’s Covid-19 tests in particular have seen massive demand, and it also aided the Diagnostics segment revenue growth in Q2, with revenue from Molecular Diagnostics surging 3x to $359 million.

It is not that Abbott’s near term growth story is limited to Covid-19 related products. The company’s Medical Devices business, in line with that of its peers, has seen a contraction in Q2 due to deferment of elective surgeries. We believe these surgeries will be attended to over the coming quarters, as economies gradually open up, and result in increased demand for medical devices. Abbott’s Freestyle Libre in particular has gained market share and its sales have surged 50% y-o-y in the first half of 2020. The strong growth will likely continue for Freestyle Libre given its distinctive advantage of not requiring pricks to monitor one’s glucose levels. Looking at Nutritionals, the segment sales also posted sales growth in Q2 despite a tough environment. In the wake of the Covid-19 pandemic, there has been an increased focus on health supplements and nutritions. Abbott has a strong foothold in this segment with annual sales of over $7 billion for its nutritional products. The sales will likely continue to trend higher over the coming years. Overall, the company is poised to see steady sales growth over the coming years. That said, the 2020 revenues are expected to remain flat, primarily due to lower Medical Devices segment sales, amid the deferment of elective surgeries seen in the first half of the year.

The second key opportunity stems from Abbott’s valuation multiple compared to its peers. The stock now trades at 31x its projected 2020 adjusted earnings per share of about $3.20. In comparison, to earn close to $3 per year from a bank, you’d have to deposit about $300 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At Abbott’s current share price of roughly $100, we are talking about a PE multiple of around 31x based on expected 2020 adjusted earnings of $3.20, and we think a figure closer to 34x will be appropriate. While the 34x number appears high compared to levels seen over the recent years, it is due to the fact that 2020 EPS will likely be lower given the impact of Covid-19. The estimated Non-GAAP EPS of $3.20 in 2020 compares with $3.26 and $2.90 figures seen in 2019 and 2018, respectively. With the Medical Devices business expected to see strong growth from next year, and market share gains for Freestyle Libre, plus continued high demand for Covid-19 testing, clubbed with margin expansion due to better product mix and cost cutting measures, this will result in strong earnings growth over the coming years. In fact, we estimate the 2021 Non-GAAP EPS to be $3.80 per share, and at the current price of $100, ABT stock is trading at just 26x 2021 (expected) earnings. Also, Abbott’s P/E multiple is lower compared to some of its peers, such as Boston Scientific which currently trades at 38x its average consensus 2020 earnings, while Intuitive Surgical trades at 77x.

That said, there is a near term risk in the company’s Medical Devices segment.

Given the current Covid-19 pandemic, several types of elective surgeries were postponed in the first half of the year, resulting in a significant impact on Medical Devices business for Abbott. In fact, the company saw a 21% dip in Medical Devices segment sales in Q2 despite an outperformance on the Diabetes portfolio. However, the situation is changing on the ground with an increase in number of procedures performed as the economies open up. The rebound in economic growth and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. 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. The complete set of coronavirus impact and timing analyses is available here. For Abbott the key trend to watch out for will be the Medical Devices segment sales in Q3, as elective surgeries gain pace over the coming months.