Abbott Laboratories (NYSE:ABT) reported on Wednesday that they had met the Street’s second quarter earnings expectations, increasing diluted earnings 10 percent year-over-year to $1.24 per share. Sales increased 6.7 percent over the second, despite a 4.7 percent hit due to unfavorable exchange rates. Abbott is held by a number of hedge funds, including Roberto Mignone’ Bridger Management and Ricky Sandler’s Eminence Capital. Is Abbott Labs a good investment right now?
The company reported $9.8 billion in sales for the second quarter, boosted by sales of Humira, a therapy for rheumatoid arthritis. The drug still has about two years of robust sales levels left until its patent expires. Abbott has seen a 6 percent increase in proprietary (patented) medicine sales year-over-year compared to the first half of 2011. Shares of the company have increased 18 percent in value over the past six months and are now trading near their 52-week high around $66.
The company’s Xience eluting stent received approval in Japan for the treatment of coronary artery disease. Other products, like AndroGel and Synagis, are undergoing healthy sales. AndroGel’s sales have increased 24 percent year-over-year, and sales are expected to increase over the next few years.
Abbott’s valuation might make now a tough entry point. The company’s total cash flow has increased incrementally over the past few years, and its price/ cash flow at around 11 is within the sector average. Compared to GlaxoSmithKline (NYSE:GSK) and Roche (RHHBY), whose shares are trading at 14 times earnings, Abbott’s shares are trading at 20 times lagging earnings. Additionally, in 2011, Abbott’s shares were trading at a historically low 7.9 times EBITDA, propelling Abbott’s share price earlier this year.
How does Abbott compare to its peers going forward? Among the $100 billion-plus pharma businesses, including Pfizer (NYSE:PFE), GlaxoSmithKline, and Merck (NYSE:MRK), Abbott is the only one that I see achieving an annualized growth rate above 10 percent over the next few years. Abbott is trading at about 13 times forward consensus earnings estimates, whereas the rest are positioned somewhat below Abbott. Abbott’s price has growth built in, so management and research teams need to step up to execute this growth.
Actually, I think the biggest catalyst for this growth for Abbott will be its projected spin-off event later this year. The Form 10 pro forma documents indicate that AbbVie was responsible for $3.8 billion of Abbott’s total earnings and about 45 percent of the company’s total revenue. In 2004, Abbott also spun off its hospital supplies division, Hospira (NYSE:HSP). Hospira shares saw considerable growth; two years after its founding, Hospira shares had appreciated over 60 percent. This is typical for spin-offs (typical also is the fact that Hospira shares dropped after this period). However, with AbbVie, we have a company that is going to be around 10 times larger than Hospira is presently by market cap. Hospira’s market cap is only about $5 billion.
With the estimated $5.05 earnings estimate for 2012, Abbott is expected to realize a 65 percent increase year-over-year in earnings, a historical high. The upside on Abbott, given its recent price rebound and fair-value adjustment, seems limited, though pharmaceuticals will be interesting to watch in an election year. Much of the Affordable Care Act provisions are ill-understood, and the political impact of the U.S. presidential election will give pharmaceutical investors a better idea of what the payment environment for health care will be.