These Stocks Can Offer Higher Returns Compared To Abbott Labs
We believe that there are several stocks in the healthcare sector that are better than Abbott Labs (NYSE:ABT). Abbott’s current market cap-to-operating income ratio of 41x compares with 12x for Emergent Biosolutions (EBS), 19x for Vertex Pharmaceuticals (VRTX), and 22x for Corcept Therapeutics (CORT).
Does this gap in valuation between Abbott and its peers make sense? We don’t think so, especially if we look at the fundamentals of these companies. More specifically, we arrive at our conclusion by looking at historical trends in revenues, operating income, and market cap-to-operating income ratio for these companies. Our dashboard Better Bet Than ABT Stock: Pay Less To Get More From EBS, VRTX, CORT has more details – parts of which are summarized below.
1. Revenue Growth
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Abbott’s revenues grew at an average of 8.5% over the last three years, which compares with a 40% growth for Emergent, 36% growth for Vertex, and a large 59% figure for Corcept. Even if we look at revenue growth over the last twelve-month period, Abbott’s 8.5% figure is much lower than 41%, 49%, and 25% growth rates for Emergent, Vertex, and Corcept respectively.
- Abbott has benefited from Covid-19 testing, which offset the decline seen in other businesses, including medical devices, due to the deferment of elective surgeries.
- For Emergent, the revenue growth is being largely driven by contract development and manufacturing (CDMO) business. The company has signed multiple contracts with pharmaceutical companies, including Johnson & Johnson, Novavax, Vaxart, and AstraZeneca, for developing vaccines, including the Covid-19 vaccines for Johnson & Johnson and AstraZeneca. This has aided the company’s top-line which grew a stellar 41% y-o-y in 2020, and it is estimated to grow another 30% in 2021.
- Vertex’s revenue growth over the recent past has been led by its treatment for Cystic Fibrosis (CF), a genetic disease that affects the lungs and digestive system. The company’s most important drug, a 3-in-1 pill called ‘Trikafta,” was approved by the US FDA in late 2019 and generated about $3.9 billion in its first full year of sales in 2020, and the revenues are expected to see steady growth over the coming years.
- Lastly, Corcept, which is focused on drugs for the treatment of severe metabolic, oncologic, and psychiatric disorders, has seen its revenue growth led by Korlym, an oral medication for the treatment of high blood sugar in patients with Cushing’s syndrome.
2. Operating Income Growth
The three-year average operating income growth for Abbott stands at 57%, much lower than 93% for Emergent, 205% for Vertex, and 171% for Corcept. Strong revenue growth for the latter three along with margin expansion has led to higher operating income for these companies. Looking at the last twelve months period, Abbott’s 20% operating income growth is much lower than 280%, 134%, and 31% growth rates for Emergent, Vertex, and Corcept respectively.
The Net of It All
Although Abbott’s revenue base is much larger than Emergent, Vertex, and Corcept, each of these companies has seen higher growth in revenues and operating income than Abbott in the last twelve months as well as the last three years. Yet, they appear to be significantly cheaper than Abbott. Despite better profit and revenue growth, these companies have a comparatively lower market cap-to-operating income ratio.
Abbott’s persistent underperformance in revenue and operating income growth reinforces our conclusion that the stock is expensive compared to its peers, and we think this gap in valuation will eventually narrow over time to favor the group of comparatively less expensive names. As such, we believe that Emergent, Vertex, and Corcept are currently better buying opportunities compared to Abbott.
While Abbott stock looks comparatively expensive, 2020 has also created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Pfizer vs. Merck.
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