Abbott Stands Out From Pack

11/15/2010


  Recent Price
$50
  Dividend
$1.76
  Yield
3.5%
  P/E Ratio
12
  Shares (millions)
1,554
  Long-Term Debt as % of Capital
39%
  52-Week Price Range
$56.79 - $44.59

Because major U.S. pharmaceutical companies face patent expirations on blockbuster drugs, consensus earnings expectations for the group are modest. Annualized per-share-profit growth for Merck ($36; MRK) and Johnson & Johnson ($64; JNJ) is estimated at 6% for the next five years, versus 3% for Pfizer ($17; PFE) and Bristol-Myers Squibb ($26; BMY). Eli Lilly’s ($36; LLY) profits are actually projected to decline at a 6% clip.

Then there’s Abbott Laboratories ($50; ABT), which Wall Street expects to increase earnings at a 10% annual rate over the next five years. Yet the market appears to discount that outlook, and the stock’s price/earnings-to-growth ratio (PEG) of 1.2 is well below the PEGs of Merck (1.8), J&J (2.3), Pfizer (2.6), and Bristol-Myers (4.7). To calculate the PEG ratio, we divide the P/E ratio based on estimated current-year profits by the long-term growth estimate.

Like its peers, Abbott will inevitably confront patent expirations. However, none of the company’s key drugs loses exclusivity before 2016, leaving Abbott time to nurture some new drugs from its rich product pipeline. The stock, yielding 3.5%, is a Buy and a Long-Term Buy.

Humira sets pace

For now, Abbott leans heavily on blockbuster arthritis treatment Humira, which generates 33% of pharmaceutical sales and 19% of company revenue. Humira’s growth rate is slowing as it penetrates more markets — management sees sales growth of 20% in 2010, down from 50% in 2008.

Sheltered from generic competition until 2016, Humira may see a less-precipitous sales decline than normal for a drug coming off patent. The monoclonal antibody’s characteristics will be tough for rivals to duplicate. Still, Humira’s slowing growth rate and Pfizer’s efforts to develop a similar drug in pill form (Humira is administered via injection) add an element of urgency to Abbott’s drug-development efforts.

Internal investment and acquisitions have fattened Abbott’s drug pipeline in recent years. An experimental psoriasis drug awaiting regulatory approval outperformed a rival treatment in a late-stage trial. Abbott hopes to present its experimental MitraClip valve-repair system to U.S. regulators in 2011, and a dissolving stent called ABSORB could reach the market by 2012.

In the first half of this year, Abbott agreed to spend about $10 billion on acquisitions to boost its presence in Asia and other emerging markets. In September, Abbott agreed to pay $450 million for the rights to sell a potential blockbuster kidney drug from Reata Pharmaceuticals in most markets outside of the U.S.

Conclusion

Wall Street expects per-share-profit growth of 12% this year and next year. The stock trades at 12 times trailing earnings, 27% below its five-year average P/E. Abbott shares also trade at a discount of at least 20% to five-year norms for price/cash flow, price/sales, and price/book. An annual report for Abbott Laboratories can be obtained at 100 Abbott Park Road, Abbott Park, IL 60064; (847) 937-6100; www.abbott.com.

ABBOTT LABORATORIES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '10
1.05
vs.
0.92
+ 12%
52.86
-
44.59
13 - 11
Jun '10
1.01
vs.
0.89
+ 18%
53.25
-
45.26
14 - 12
Mar '10
0.81
vs.
0.73
+ 15%
56.79
-
52.21
15 - 14
Dec '09
1.18
vs.
0.89
+ 11%
54.97
-
48.41
16 - 14
           
Year
(Dec.)
Sales
 (Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2009
30.76
3.72
1.56
57.39
-
41.27
15 - 11
2008
29.53
3.03
1.41
61.09
-
45.75
20 - 15
2007
25.91
2.84
1.27
59.50
-
48.75
21 - 17
2006
22.48
2.52
1.16
49.87
-
39.18
20 - 16
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
76
82
79
76
82
32

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com