This Medical Devices Company Is A Better Pick Over Abbott Stock

ABT: Abbott Laboratories logo
Abbott Laboratories

We think that Stryker Corp. stock (NYSE: SYK) currently is a better pick compared to its industry peer, Abbott stock (NYSE: ABT), despite it being the more expensive of the two, trading at 6.1x trailing revenues compared to 5.1x for Abbott. Even if we were to look at the P/EBIT ratio, SYK stock appears to be more expensive, with a 40.6x P/EBIT ratio, compared to 24.4x for ABT stock. Although both the companies saw a rise in revenue in the recent past, Abbott’s growth has been better, primarily due to its Covid-19 testing.

If we look at stock returns, Stryker’s 5% growth is better than Abbott’s <1% change over the last twelve months. This compares with 6% growth in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Stryker is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that SYK stock will offer better returns than ABT stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Abbott vs. StrykerWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Abbott’s Revenue Growth Has Been Stronger

  • Both companies posted sales growth over the last twelve months. Still, Abbott’s revenue growth of 24% is higher than 19% for Stryker.
  • Looking at a longer time frame, Abbott’s sales grew at an average growth rate of 12.4% to $43.1 billion in 2021, compared to $30.6 billion in 2018, while that of Stryker grew at 8.4% to $17.1 billion in 2021, compared to $13.6 billion in 2018.
  • Abbott’s sales over the recent years were driven by a very high demand for Covid-19 testing. However, as the Covid-19 cases decline, the demand for testing is also expected to fall, weighing on Abbott’s diagnostics business in 2022.
  • That said, the company’s medical devices and established pharmaceuticals sales will likely see steady growth over the coming years.
  • Stryker’s revenue growth has been driven by new product launches, such as – Surgi-Count+ – a surgical sponge counting system. Last month, it launched Insignia Hip Stem and Power-PRO 2 ambulance cot. The new launches are likely to aid its revenue growth going forward.
  • Stryker’s revenue growth has also been buoyed by the acquisition of Wright Medical, a medical device company, in late 2020. Earlier this year, Stryker agreed to acquire Vocera Communications – a company focused on communications systems for the healthcare industry.
  • Our Abbott Revenue and Stryker Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Stryker’s revenue is expected to grow faster than Abbott’s over the next three years, given that Abbott’s diagnostics business will see a decline due to lower Covid-19 testing demand. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 7.4% for Stryker, compared to a 4.5% CAGR for Abbott, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Abbott Is More Profitable, And It Offers Lower Risk

  • Abbott’s operating margin of 24.5% over the last twelve-month period is better than 19.1% for Stryker.
  • This compares with 16.1% and 18.2% figures seen in 2019, before the pandemic, respectively.
  • Abbott’s free cash flow margin of 24.5% is better than 19.1% for Stryker.
  • Our Abbott Operating Income and Stryker Operating Income dashboards have more details.
  • Looking at financial risk, Stryker’s 12% debt as a percentage of equity is higher than 8% for Abbott, while its 9% cash as a percentage of assets is lower than the 14% for Abbott, implying that Abbott has a better debt position and it has more cash cushion.

3. The Net of It All

  • We see that Abbott has demonstrated better revenue growth, is more profitable, has better debt and cash position, and is available at a comparatively lower valuation.
  • However, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Stryker is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Abbott and Stryker over the next three years and points to an expected return of 15% for Stryker over this period vs. a 9% expected return for ABT stock, implying that investors are better off buying SYK over ABT, based on Trefis Machine Learning analysis – Abbott vs. Stryker – which also provides more details on how we arrive at these numbers.

While SYK stock may outperform ABT, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Medtronic vs. Masco.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Apr 2022
MTD [1]
YTD [1]
Total [2]
ABT Return 4% -13% 219%
SYK Return 3% 3% 131%
S&P 500 Return -2% -6% 99%
Trefis Multi-Strategy Portfolio -2% -9% 257%

[1] Month-to-date and year-to-date as of 4/21/2022
[2] Cumulative total returns since the end of 2016

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