A first look at Abbott Laboratories
As I've recounted in my e-mails this week, my dad got a pacemaker on Monday. The doctors gave us a choice of pacemakers made by three large American medical-device companies.
The first was Boston Scientific (BSX), which I analyzed on July 1 and shared the bull and bear arguments for on July 2.
The second was Medtronic (MDT), whose pacemaker we ended up choosing. I analyzed the company's historical financials and valuation yesterday.
The third was Abbott Laboratories (ABT), which I'll take a look at today...
In yesterday's e-mail, I said that Abbott's stock had only risen 139% over the past 20 years versus 448% for the S&P 500 Index. But I failed to account for the company spinning off AbbVie (ABBV), which cut Abbott's stock roughly in half at the beginning of 2013.
Adjusting for this, Abbott is up a much more respectable 379%, as you can see in this chart (with dividends, the performance would be even better):
Had shareholders held on to their AbbVie shares, they would have done spectacularly well – it's up 743% since the spinoff:
Now, let's take a look at Abbott's historical financials...
(Note: In general, Abbott's data prior to 2011 includes AbbVie. But cash flow and debt include AbbVie prior to 2013. This is why some charts below have different time frames.)
Like its peers, Abbott has had consistently high margins:
Revenue and operating income grew strongly from 2016 to 2021. But they've stagnated since then – like the stock has – as COVID-19 testing revenue fell away:
Free cash flow ("FCF") has followed the same trajectory:
The company has used its robust FCF to pay a modest and growing dividend (the stock is currently yielding 2.3%), buy back some shares, and make an occasional large acquisition (St. Jude Medical and Alere in 2017 and Exact Sciences in 2026):
Abbott's net debt spiked in 2017 and 2026, reflecting the costs of the acquisitions:
Its current net debt of $27.1 billion is high but manageable, in light of $6.8 billion of trailing-12-month ("TTM") FCF.
In summary, I would characterize Abbott's historical financials as good but not great. It has high margins and FCF, but its top line has barely grown in the past five years. Profits and FCF have actually declined.
This makes me suspicious that Abbott might have overpaid for Exact Sciences to boost growth. It paid 5.7 times next year's sales and a 50% premium to where Exact's stock was trading before acquisition rumors appeared.
Might all this be reflected in Abbott's valuation? Let's take a look...
The company had a $189 billion market cap as of yesterday. Adding the $27 billion in net debt, it has a $216 billion enterprise value.
At yesterday's closing price of $107.25, the stock is trading at 19.4 times this year's consensus analysts' estimates of $5.52 per share and 18.1 times next year's estimate of $5.94 per share.
This year's price-to-earnings (P/E) multiple is exactly the 19.4 times average that the stock has traded at over the past 20 years:
Like Medtronic, Abbott is a very high-quality – but very slow-growing – business.
However, it's trading at a higher multiple than Medtronic. And it has the risk of a recent large, expensive acquisition and the associated debt. So I'm even less interested in this stock at today's price.
But my team and I will keep an eye on Abbott. If we ever decide it's a buy, Stansberry's Investment Advisory subscribers will be the first to know, as always. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.