Pick Either Abbott Stock Or Its Industry Peer – Both Are Likely To Offer Similar Returns

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ABT: Abbott Laboratories logo
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Abbott Laboratories

We believe that Abbott stock (NYSE: ABT) and Medtronic stock (NYSE: MDT) in the medical devices industry will likely give similar returns over the next three years. Although Abbott is trading at a higher valuation of 4.2x trailing revenues, compared to 3.4x for Medtronic, this gap in the valuation is justified, given Abbott’s superior revenue growth, profitability, and lower financial risk, as discussed below.

If we look at stock returns, both ABT and MDT, with about a 25% fall this year, have slightly underperformed the broader S&P 500 index, down 20%. There is more to the comparison, and in the sections below, we discuss the possible returns from these stocks in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Abbott vs. MedtronicBoth Seem Similar Bets. Parts of the analysis are summarized below.

1. Abbott’s Revenue Growth Is Better

  • Abbott’s revenue growth of 6.4% over the last twelve months is higher than -1.7% for Medtronic.
  • Even if we look at a longer time frame, Abbott has fared better with its sales at an average annual rate of 12.4% to $43.1 billion in 2021, compared to $30.6 billion in 2018, while Medtronic saw its sales rise at an average rate of 1.3% to $31.7 billion in fiscal 2022 (fiscal ends in April), vs. $30.6 billion in fiscal 2019.
  • 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 have declined over the recent quarters, the demand for testing is falling, weighing on Abbott’s diagnostics business.
  • That said, the company’s medical devices and established pharmaceutical sales will likely see steady growth over the coming years.
  • Medtronic’s sales were also hurt during the pandemic due to the postponement of elective surgeries. The rise of new Covid-19 variants, including Delta and Omicron, impacted demand recovery last year.
  • There are high hopes for Medtronic’s most advanced insulin pump system – MiniMed 780G – to drive its diabetes sales in the future. The product is yet to be approved in the U.S.
  • Of late, Medtronic has benefited from its new products and a better pricing environment.
  • Our Abbott Revenue Comparison and Medtronic Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Abbott’s revenue is expected to grow faster than Medtronic’s 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 4.2% for Abbott, compared to a 1.6% CAGR for Medtronic, 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 And Comes With A Lower Risk

  • Abbott’s operating margin of 22.1% over the last twelve-month period is slightly better than 21.2% for Medtronic.
  • The figures stood at 16.1% and 25.2% in 2019, before the pandemic, respectively.
  • Abbott’s free cash flow margin of 23% aligns with Medtronic’s.
  • Our Abbott Operating Income Comparison and Medtronic Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Abbott fares much better. Its 8.8% debt as a percentage of equity is lower than 22.7% for Medtronic, while its 13.6% cash as a percentage of assets is higher than the 9.9% for the latter, implying that Abbott has a better debt position and also has more cash cushion.

3. The Net of It All

  • We see that Abbott has demonstrated better revenue growth, is more profitable, and offers lower financial risk with a better debt position and more cash cushion. On the other hand, Medtronic is available at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both stocks are likely to offer similar returns.
  • The table below summarizes our revenue and return expectations for Abbott and Medtronic over the next three years and points to an expected return of 16% for Abbott over this period vs. a 21% expected return for Medtronic stock, implying that both stocks offer good buying opportunity at current levels, based on Trefis Machine Learning analysis – Abbott vs. Medtronic – which also provides more details on how we arrive at these numbers.

While both ABT and MDT may offer similar returns over the next three years, it is helpful to see how Abbott’s Peers fares 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 at how counter-intuitive the stock valuation is for Xylem vs. Merck.

With higher inflation and the Fed raising interest rates, among other factors, ABT stock has fallen 24% 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.

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 Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
ABT Return -1% -24% 178%
MDT Return -2% -25% 8%
S&P 500 Return -6% -20% 71%
Trefis Multi-Strategy Portfolio -7% -23% 209%

[1] Month-to-date and year-to-date as of 12/20/2022
[2] Cumulative total returns since the end of 2016

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