Should You Worry About Abbott Laboratories (NYSE:ABT)’s Pessimistic Tone?
At their most recent call with analysts, Abbott Laboratories (NYSE:ABT)’s management sounded a bit pessimistic, especially about the near-term prospects in emerging markets. Panic over the company’s future has been heightened by the fact that Abbott’s earnings also fell and missed expectations in the most recent quarter.
If you are an investor in Abbott or are considering getting into it, how do you deal with the disheartening news about the company? One must not look further then the facts and let them guide your investment decision. This Abbott analysis article tries to bring out important facts about the company, highlight its efforts to prosperity and challenges threatening to offset those efforts.
How does Abbott generate its revenues?
Abbott Laboratories (NYSE:ABT) generates revenue through four major channels namely Nutrition, Medical Devices, Diagnostics and Established Pharmaceuticals (generics).
In 2015, Nutrition segment contributed 34% of revenue, Medical Devices accounted for 27%, Diagnostics contributed 23% of revenue and Established Pharmaceuticals brought in 16% of revenue.
The chart below captures Abbott’s segmental revenue streams:
What’s does Abbott hedge for problems?
The company has a diversified product portfolio, which has been a great advantage for the company in sidestepping market pressures. In addition to product diversity, Abbott also operates in diversified geographical locals, which helps the company to spread operating risks. Do these strategies help? Here is a recap of Abbott’s most recent quarterly report.
Earnings highlight: Abbott failed to impress in 4Q2015 as both earnings and revenue fell from a similar quarter a year earlier and also fell short of the consensus estimate.Profit in the quarter declined 15%, leading to EPS of $0.51. EPS in the year-ago quarter was $0.59. Analysts on the average were expecting EPS of $0.61 in the quarter. Revenues of $5.19 billion descended 3.1% YoY and also missed the consensus estimate at $5.23 billion.
2016 Outlook: Citing currency headwinds and weakness in a number of key international markets, Abbott issued a soft EPS guidance for 2016. The company forecasted EPS in the range of $2.10 to $2.20, below the $2.26 that analysts had been expecting for the year.
Like any other company, Abbott Laboratories (NYSE:ABT) is sometimes faced with challenges that it can do little about – adverse currency fluctuation is one of them. A closer look at the recent quarterly report shows that execution wasn’t a problem in their results, but near-term adverse developments in the market were. Perhaps that should offer hope that Abbott’s long-term outlook is more brilliant than the near-term. Management’s pessimistic tone during a recent meeting with investors left them wondering whether the insiders might be aware of a more serious problem.
Managing expectations or pessimism?
What did Abbott’s CEO, Miles White, actually say? Besides the soft 2016 guidance, White talked about how M&A has become expensive and why the company would cool its appetite for assets in emerging markets unless they are compelling enough.
However, White also sounded optimistic in the same breath, saying that he expected Abbott to continue doing well in the international markets. Strong demand for healthcare products in emerging markets is expected to fuel international growth. Abbott is particularly excited about growth prospects in China and Latin America.
Where does that leave you? Optimistic or pessimistic? Any doubts you might still have about Abbott can be cleared by examining its various businesses to see the strength in them or challenges they are likely to face.
Abbott Laboratories (NYSE:ABT) is the leader in adult nutritionsegment and it also holds a top position in paediatric nutrition market in a number of key global markets such as the U.S.Emerging markets account for about 45% of Abbott’s nutritional sales, with less than 50% of the sales coming from the U.S.
Abbott has shown a commitment to improve margins in its nutrition business. Operating margins in the segment have increased more than 8% over the last five years and there appears to be room for further margins expansion as Abbott continues an efficiency drive in the segment.Investments such as an R&D facility in Shanghai and manufacturing plants in India are helping Abbott to expand its nutrition capacity, drive sales and boost margins.
Abbott is aleading global player in the stent-themed drug market. The company is in the process of expanding the market for its stent drug Absorb. Abbott wants to introduce the drug in the U.S., China and Japan. These three markets represent more than 50% of the global stent treatment market, which means a huge market opportunity for Absorb.
In addition to their stent solutions, Abbott has also continued to expand its portfolio of vascular treatments. The company acquired Tendyne to boost its position in the valve repair market. Its MitraClip device is already a highly successful product that has been used to treat more than 25,000 patients and counting.
There is huge sales opportunity for Abbott’s vascular treatment products in the emerging markets.
Diagnostic is Abbott’s business segment that has been characterized by more consistent growth of usually mid to high single-digit growth rate. Abbott continues to empower its Diagnostic business by adding strategic assets to it. The company is currently in the process of acquiring Alere Inc (NYSE:ALR), a diagnostic-test company, for $5.8 billion. Abbott expects the acquisition of Alere to improve its position in point-of-care testing market in the Diagnostic segment.
Alere is expected to be accretive to revenue and earnings immediately after the transaction close. The management of Abbott is projecting Diagnostic sales to surpass $7 billion with Alere on board. Additionally, Alere acquisition is expected to drive $500 million in pretax savings by 2019.
Abbott Laboratories (NYSE:ABT) has mostly used strategic acquisitions to build its generics business, and the entire Established Pharmaceuticals segment. The acquisitions of Veropharm and CFR Pharmaceuticals have had far-reaching positive impact on Abbott’s Established Pharmaceuticals business.
CFR Pharmaceuticals contributed immensely to Abbott’s branded generic drug business, bringing additional production plants, R&D facilities and expanding Abbott’s portfolio of generics.CFR Pharmaceuticals also helped elevate the profile of Abbott in the generics market, putting it among the top 10 pharmaceutical companies in Latin America.
Veropharm has also contributed to Abbott and much more is still expected from the acquisition. Through Veropharm, Abbott expanded its manufacturing footprint in Russia.
Abbott is not only relying on acquisitions to drive its generics business, but the company also continues internal innovation efforts to build more strength in the business and allow for more robust growth over the long-term.
Challenges and opportunities in emerging markets
Economic slowdown in China, and a stronger U.S. dollar threatens Abbott’s international business, especially in emerging markets. In places like Venezuela, Abbott expects a 2% adverse impact on revenue growth in 2016.
There are multiple macroeconomic headwinds that threaten to slow down or take away growth in emerging markets in the near-term. For example, shrinking oil prices means reduced purchasing power in economies majorly funded by oil, and that could limit sale of Abbott’s products, thus contributing to underwhelming performance.
However, in the face of apparent adversity in emerging markets, Abbott’s management still remains constructive of the long-term prospects in those markets. For example, management is modeling double-digit growth in emerging markets in 2016 (in constant currency terms). Abbott is particularly optimistic about long-term growth opportunities in its emerging markets.
Abbott Laboratories (NYSE:ABT) seems to have what it takes to cope with the near-term pressures. However, over the long-term, the company seems to have a brilliant future, thanks largely to crisp execution by forward-thinking management.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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