We believe that there are other stocks in the healthcare sector that are currently better valued than Aboott Laboratories (NYSE: ABT). Abbott’s current price-to-operating income ratio (P/EBIT) of 30x is much higher than levels of under 12x for PerkinElmer (PKI), and 4x for Quidel (QDEL). Both of these stocks have a lower valuation (P/EBIT) compared to Abbott, while both of them have seen higher revenue and operating income growth. This disconnect between valuation and performance could mean that you are better off buying PKI and QDEL vs. ABT. More specifically, we arrive at our conclusion by looking at historical trends in revenues, operating income, and P/EBIT for these companies. Our dashboard Better Bet Than Abbott Stock: Pay Less To Get More From Sector Peers PKI, QDEL has more details – parts of which are summarized below.
1. Revenue Growth
Abbott’s revenue grew at an average rate of 8.2% over the last three years, as compared to revenue growth of 19.0% for PerkinElmer, and a large 100% for Quidel. Even if we look at the revenue growth over the last twelve month period, Abbott’s top-line growth of 16% is much lower than 54% for PerkinElmer and a whopping 211% for Quidel.
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Abbott’s revenue growth over the recent past has been driven by higher diagnostics sales, primarily from its Covid-19 tests, which more than offset the decline seen in other segments, primarily medical devices, due to postponement of elective surgeries due to the impact of the pandemic, in the first half of 2020. PerkinElmer sales were also higher due to massive demand for Covid-19 tests, offsetting the decline in other businesses. In fact, the same is the case for Quidel, which saw its sales surge due to higher demand for testing.
2. Operating Income Growth
The three-year average operating income growth for Abbott stands at 57%, lower than 68% for PerkinLemer, and a large 409% for Quidel. Better revenue growth as well as margin expansion for the latter two led to higher operating income for these companies. Looking at the last twelve month period, Abbott’s 49% growth in operating income is much lower than the 297% for PerkinElmer and over 1000% for Quidel. The operating margins for Quidel surged to 64.4% in 2020, compared to just 9.8% in 2017. Much of this growth came over the last twelve-month period, when demand for Covid-19 testing was very high across the globe.
The Net of It All
Although Abbott’s revenue base is much larger than PerkinElmer and Quidel, both of these companies have seen higher growth in revenues and operating income than Abbott in the last twelve months as well as the last three years. Yet, they appear to be valued significantly lower than Abbott. Why is that? To some extent, the gap in valuation does make sense, given that there are valid concerns of future sales growth, especially for Quidel. Abbott is far more diversified compared to PerkinElmer and Quidel, and when Covid-19 testing declines, Abbott’s other business segments, primarily medical devices, will drive the revenue growth. For PerkinElmer, there will likely be a rebound in the demand for life science research, food, environmental and industrial testing.
While there is no denying that Quidel will see a decline in sales, as the Covid-19 crisis winds down, some of the demand for testing will likely remain over the next few years, boding well for all three companies, but more meaningful for Quidel, given its high reliance on tests. Overall, we think that this gap in valuation will eventually narrow over time to favor the group of comparatively less expensive names. As such, we believe that PKI and QDEL are currently better buying opportunities compared to ABT stock.
While QDEL and PKI stocks may outperform ABT in the near term, 2020 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 Johnson & Johnson vs Quest Diagnostics.