After a 22% fall year-to-date, at the current levels we believe Abbott stock (NYSE: ABT) is undervalued. ABT stock fell from around $140 in early January to under $110 now. The YTD 22% fall for ABT compares with -20% returns for the broader S&P500 index.
Looking at the longer term, ABT stock is up 60% from levels seen in late 2018. This marks an outperformance compared to some of its peers, with Medtronic stock rising around 1%, Boston Scientific stock up 9%, Stryker stock seeing a 30% growth, and the S&P 500 index rising 54% over the same period.
This 60% rise for ABT stock since late 2018 was driven by: 1. Abbott’s revenue, which grew a significant 46% to $44.5 billion over the last twelve months, compared to $30.6 billion in 2018, 2. the company’s P/S ratio rising 9% to 4.3x trailing revenues, from 3.9x in 2018, and 3. a <1% fall in its total shares outstanding to 1.8 billion currently. This means the company’s revenue per share rose 46% to $25.42 now, compared to $17.42 in 2018.
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Abbott’s sales over the recent years were driven by a very high demand for Covid-19 testing. For perspective, Diagnostics segment sales surged 2x to $15.6 billion in 2021, compared to $7.7. billion in 2019, before the pandemic. However, as the Covid-19 cases decline, the demand for testing is also expected to fall, weighing on Abbott’s diagnostics business in 2022 and beyond. That said, the company’s medical devices and established pharmaceutical sales will likely see steady growth over the coming years.
The company’s nutritional segment has had a tough start this year, with manufacturing challenges at its Michigan facility impacting the supply and, in turn, sales of baby formula products. The segment sales were down 7% to $1.9 billion. However, with the reopening of the Michigan plant, the company will likely be able to meet the demand with increased production over the coming quarters. Abbott’s continuous glucose monitoring device – Freestyle Libre – sales rose a solid 26% in Q1 2022 to nearly $1.0 billion. Abbott has recently secured the U.S. FDA approval for its Freestyle Libre 3, and this will help it gain market share and aid the diabetes business sales growth.
While the company has good prospects, it faces headwinds from the current weakness in broader markets. The S&P500 has now entered the bear market territory with rising concerns of slowing economic growth given the high inflation, Fed action, and supply chain disruptions. These factors may impact Abbott’s performance, as well.
However, some of these factors appear to have already been priced in by the investors, given the 22% decline in ABT stock this year. We estimate Abbott’s valuation to be $141 per share, reflecting a 30% upside from its current market price of $109, implying that investors are likely to be better off buying ABT stock in the recent dip for solid gains in the long-term. At its current levels, ABT stock is trading at just 4.3x trailing revenues, compared to the last three-year average of 5.4x, making the stock attractive from a valuation point of view.
Furthermore, 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 Xylem vs. Merck.
With inflation rising and the Fed raising interest rates, among other factors, ABT stock has fallen 22% this year. Can it drop more? See how low Abbott stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||2%||-19%||72%|
|Trefis Multi-Strategy Portfolio||4%||-22%||211%|
 Month-to-date and year-to-date as of 7/7/2022
 Cumulative total returns since the end of 2016