Wednesday, July 13, 2005
July 13, 2005 - Minyanville.com / MarketWatch
Commentary: Weakness driven by shortsightedness DENVER (MarketWatch) -- Abbott Labs got a less than happy round of applause Wednesday from the market even as it beat the consensus earnings number by a penny. The top line growth, however, was more than impressive as sales grew 15.2% in constant currency; bottom line growth mostly followed the sales growth. Cost of goods sold has soared in the quarter due to a very fast growth of lower margin drugs Mobic and Flomax. Is this a problem? Well I would love to see sales grow and margins expand at the same time, but I wish all my companies had Abbott's (ABT: news, chart, profile) problem. Margin shrinkage that is due to an unfavorable (to margins) product mix doesn't really worry me. I would be more concerned if the margin compression was driven by competitive forces or price decreases. After backing out acquired R&D from the last year's numbers to equalize the comparisons, operating earnings still grew 14% -- a very respectable number. There was plenty of one-time noise below the operating earnings number from higher taxes due to foreign cash repatriation etc; I am not going to waste my breath on it. I'll let the sell-side analysts worry about that, as analyzing that noise and asking 'smart' questions on the conference calls seems to be enough justification for their existence. What I really liked about company's performance in the quarter is that growth was broad based (very typical for Abbott) in almost all of its segments -- screaming quality. As I mentioned before, Abbott's product line is extremely diversified. It doesn't have a typical blockbuster exposure that has been haunting many large pharmaceutical companies. Putting all the noise aside (i.e. Abbott projected a third-quarter number 2 cents below analyst estimates, though it kept estimates for the full year intact), long-term prospects for the stock are outstanding. See April comments on Abbott here. Valuation of Abbott is still very attractive, and actually just became more attractive after Wednesday's sell off (not advice). It trades at 17 times 2006 earnings. There is a hidden call option embedded in the stock, as the market doesn't put any value on a drug coated stent that is still in development. So far Abbott is only incurring R&D costs related with stent development but no revenues, thus further depressing its margins. In my view, weakness in the stock is most likely a buying opportunity (not advice -- I mean it), especially when the weakness is driven by Wall Street shortsightedness.
Vitaliy N. Katsenelson, CFA At the time the article was published author's firm had a position in Abbott. Copyright Minyanville.com 2005