Abbott Stock And Its Sector Peer Likely To Offer Similar Returns

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ABT: Abbott Laboratories logo
ABT
Abbott Laboratories

We think healthcare companies Abbott stock (NYSE: ABT) and Baxter stock (NYSE: BAX) may offer similar returns over the next few years. Although BAX is trading at a comparatively lower valuation of 2.2x trailing revenues than 3.4x for Abbott, this gap in the valuation is justified given Abbott’s superior revenue growth and profitability, as discussed below.

Looking at stock returns, ABT has seen a fall of 24% so far this year, while BAX is down 30%, underperforming the broader indices, with the S&P500 index down 13%. In the sections below, we discuss the possible stock returns for ABT and BAX 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. BaxterWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Abbott’s Revenue Growth Is Better

  • Abbott’s revenue growth of 37.8% over the last twelve months is higher than 11.2% for Baxter.
  • Even if we look at a longer time frame, Abbott’s sales growth has been better. It rose at an average annual growth rate of 12.4% to $43.1 billion in 2021, compared to $30.6 billion in 2018, while Baxter saw its revenue rise at an average annual rate of just 4.9% to $12.8 billion in 2021, compared to $11.1 billion in 2018.
  • Abbott’s sales growth over the recent years was 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 2023.
  • That said, the company’s medical devices and established pharmaceutical sales will likely see steady growth over the coming years.
  • Baxter’s sales growth has been led by increased demand for its advanced surgery products. In December 2021, Baxter completed the Hillrom acquisition, which added connected care offerings, including Smart Beds and patient monitoring products, to Baxter’s existing portfolio of acute, nutritional, renal, hospital, and surgical care products.
  • The Hillrom acquisition is expected to be low double-digit EPS accretive by 2023 and even higher over the subsequent years.
  • Our Abbott Revenue and Baxter Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, both 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 the mid-single-digit average growth rate for both companies, 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 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

  • Abbott’s operating margin of 19.6% over the last twelve-month period is better than 6.4% for Baxter.
  • This compares with 16.1% and 15.0% figures seen in 2019, before the pandemic, respectively.
  • Abbott’s free cash flow margin of 18.0% is better than 14.7% for Baxter.
  • Our Abbott Operating Income and Baxter Operating Income dashboards have more details.
  • Looking at financial risk, Abbott’s debt as a percentage of equity of over 9.9% is much lower than 40.2% for Baxter, while its 12.3% cash as a percentage of assets is lower than the 16.2% for Baxter, implying that Abbott has a better debt position, but Baxter has more cash cushion.

3. The Net of It All

  • We see that Abbott has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Baxter is available at a comparatively lower valuation, and it has more cash cushion.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both Abbott and Baxter are likely to offer similar returns over the next few years.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 29% for ABT over this period and a 24% expected return for BAX stock, implying that investors can choose either of the two or both if they are looking to invest in the healthcare sector, based on Trefis Machine Learning analysis – Abbott vs. Baxter – which also provides more details on how we arrive at these numbers.

While ABT and BAX look like good buying opportunities, it is helpful to see how Abbott’s Peers and Baxter’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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 24% this year while BAX has seen a 30% decline. Can they drop more? See how low Abbott stock can go and how low Baxter stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

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 Aug 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
ABT Return -1% -24% 180%
BAX Return 2% -30% 35%
S&P 500 Return 0% -13% 85%
Trefis Multi-Strategy Portfolio -1% -14% 236%

[1] Month-to-date and year-to-date as of 8/23/2022
[2] Cumulative total returns since the end of 2016

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