Thursday, October 20, 2005

Thoughts on Abbott Labs and Lloyds TSB

October 20th 2005 -
Thoughts on Abbott Lab's 3rd Quarter Results
I was more than satisfied with Abbott Laboratories (ABT) 3rd quarter performance. Its margins were depressed in the quarter as for several reasons: It took several charges (some of which should actually benefit the company in the future); sales of Mobic, a low margin drug, were up 146% and R&D was up 15% (ahead of sales growth which excluding Mobic was still up 10.7%) as ABT was ramping up spending on development of its own stent. ABT’s performance should improve in 2006 as margins are likely to rebound (they are up sequentially but still down versus last quarter) as the company renegotiated its Mobic distribution contract. Abbott is introducing a new stent that it expects to capture significant market share over the next six months (current valuation doesn’t reflect that). ABT had some wins and losses this quarter on the drug front, but nothing was of the large Vioxx-like magnitude – the beauty of Abbott! As I mentioned before, it has a very diversified product line – all little engines of growth, as one engine misfires another one picks up the load. I am taking a 30 thousand feet approach to Abbott, not obsessing about each win and loss. I have confidence in the company’s management. I want to have exposure to the pharmaceutical industry and I am very comfortable with Abbott’s long-term risk return profile (as always, not advice).
Thoughts from the meetig with Lloyds TSB's management Yesterday, I met with management from Lloyds TSB; here are some thoughts from that meeting: The stock is down on a single concern that its 8% dividend will be cut. Management said – it will NOT happen. There are only two reasons to cut a dividend: not enough capital or capital is needed to grow the business - neither one is an issue. The company is well capitalized and it has excess capital for a rainy day. It is not planning to make large acquisitions thus there is no reason to build up a war chest. As I mentioned yesterday US Bankcorp (USB) has a similar total payout (80% of earnings paid out between dividends and stock buy backs) – so high dividend payouts are not unprecedented in this industry.
LYG is one of the most conservatively operated banks. A nice stat that proves that fact is that its mortgage portfolio average loan to value is 40%. Housing prices need to decline over 60% for LYG to start losing its collateral – no wonder it is one of two triple A rated banks in the world. Both the life insurance and wholesale (corporate) banking segments (two thirds of the business) are firing on all cylinders and should offset any weakness in the UK consumer (if the US consumer is up to his/her ears in debt the UK consumer is only up to their chest).
Another realization I had during the meeting was that the Chinese Banking industry is in many ways a sham. In general, banks give out loans and expect to get paid back (on a large portion of the loans).
It seems that Chinese banks are really just flea markets that give out money in a semi organized fashion, with interest rate they charge their clients not based on clients’ risk profile but rather on the value of client's political connections.
We will not be seeing LYG buying an interest in any Chinese “financial flea markets” anytime soon, to say the least.
Vitaliy N. Katsenelson, CFA This article is written for educational purposes only. It is not intended as a recommendation (or advice) to buy or sell securities. Author and/or his employer may have a position in the securities discussed in this article. Security positions may change at any time.
Positions: LYG and ABT


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