Here’s A Better Pick Over Abbott Stock

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We think that Teva stock (NYSE: TEVA) currently is a better pick compared to its industry peer, Abbott stock (NYSE: ABT), given its comparatively lower valuation and better prospects. TEVA stock is trading at 0.6x trailing revenues compared to 4.4x for Abbott. Even if we were to look at the P/EBIT ratio, ABT stock appears to be more expensive, with a 20.7x P/EBIT ratio, compared to 16.6x for TEVA 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, Abbott’s -1% return is better than Teva’s -13% change over the last twelve months. This compares with a -3% change in the broader S&P 500 index. While Teva’s stock has been weighed down due to concerns around the pricing environment and liabilities arising from opioid claims, Abbott has seen strong demand for its diagnostics business during the pandemic. While both the companies are likely to see continued top-line expansion, Teva is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe that TEVA 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. TevaWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Abbott’s Revenue Growth Has Been Stronger

  • Abbott’s revenue growth of 21.2% over the last twelve months is higher than 3.7% for Teva.
  • 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 Teva saw its revenue decline at an average rate of 4.5% to $15.9 billion in 2021, compared to $18.3 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.
  • Teva’s sales have been impacted by increased competition, pricing pressure, and unfavorable foreign exchange. The company sees a rapid decline in Copaxone’s sales. Copaxone garnered only $577 million in 2021 sales, compared to $1.8 billion in 2018, primarily due to generic competition.
  • However, as we look forward, Teva is expected to benefit from its biosimilar for Bristol Myers Squibb’sRevlimid.
  • Our Abbott Revenue and Teva Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, both the companies will likely see similar revenue growth over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 4.3% for Abbott, compared to a 4.5% CAGR for Teva, 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 21.2% over the last twelve-month period is better than 3.7% for Teva.
  • This compares with 16.1% and -2.6% figures seen in 2019, before the pandemic, respectively.
  • Abbott’s free cash flow margin of 21.7% is better than 7.4% for Teva.
  • Our Abbott Operating Income and Teva Operating Income dashboards have more details.
  • Looking at financial risk, Teva has a significant debt of $23 billion, resulting in debt as a percentage of equity of over 200%, much higher than just 8% for Abbott, while its 5% cash as a percentage of assets is lower than the 11% 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, and has better debt and cash positions. On the other hand, Teva 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 Teva is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Abbott and Teva over the next three years and points to an expected return of 20% for Teva over this period vs. a 12% expected return for ABT stock, implying that investors are better off buying TEVA over ABT, based on Trefis Machine Learning analysis – Abbott vs. Teva – which also provides more details on how we arrive at these numbers.

While TEVA 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 May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
ABT Return 1% -18% 199%
TEVA Return 4% 13% -75%
S&P 500 Return -2% -15% 81%
Trefis Multi-Strategy Portfolio -3% -19% 218%

[1] Month-to-date and year-to-date as of 5/27/2022
[2] Cumulative total returns since the end of 2016

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