Less than a month remains before Abbott (NYSE: ABT ) spins off its biopharmaceutical business into a new publicly traded entity to be known as AbbVie. As a result, 2013 will usher in a different business profile for the "new" Abbott. How this new version of an old company stacks up against similar companies could heavily influence the valuation that the market gives it.
Birds of a feather?
The new Abbott will include four business units with relatively balanced revenue numbers:
- Nutrition, with key products such as Similac and Pediasure, generated $6 billion in 2011 revenue.
- Medical Devices, which sells vascular, vision care, and diabetes care devices, had sales of $5.9 billion.
- Established Pharmaceuticals garnered $5.4 billion in 2011 sales from more than 500 branded generic products.
- Diagnostics accounted for $4.2 billion in sales from services including immunoassay diagnostics and blood screening.
Total 2013 revenue for the new Abbott is expected to be around $23 billion, with operating cash flow of $4 billion. Net debt of the company will be $2.5 billion.
In terms of revenue, the closest health-care comparisons include Lilly (NYSE: LLY ) , with $22.7 billion over the past 12 months, Bristol-Myers Squibb (NYSE: BMY ) , with $18.9 billion, and AstraZeneca (NYSE: AZN ) , with $29.4 billion. All three of these companies show significantly stronger operating cash flow than that projected for the new Abbott.
The big problem with these companies as comparisons, though, is that their business models are nothing like the new Abbott. Each of the three other companies has only one business segment that focuses on brand pharmaceuticals.
From a business model perspective, Johnson & Johnson (NYSE: JNJ ) stands as perhaps the most similar to the new Abbott. J&J includes three business segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. These segments very roughly align with those of the new Abbott.
Distinct differences exist between the two companies, however. J&J's Consumer unit focuses more on personal-care products and over-the-counter medications rather than nutritional products. The Pharmaceutical unit focuses on branded prescription drugs instead of branded generics, as the new Abbott will.
Abbott and J&J are more similar in their medical devices and diagnostics business segments than the other lines of business. Both companies compete in the cardiovascular, vision care, and diabetic care markets, although with different types of products.
Even if we presume that the new Abbott and J&J are birds of a feather, there's certainly no guarantee that these birds will flock together. On the other hand, they haven't exactly flown in different directions over the past five years.
The two stocks have a correlation coefficient of 0.84 since 2008. That suggests a strong relationship between share-price movements. Abbott's stock performance proved stronger over the past year, however. Shares increased nearly 19%, compared with only 10% for J&J.
Both companies line up relatively closely in a couple of key valuation metrics. Abbott's current trailing P/E of 15.78 looks significantly cheaper than J&J's trailing P/E of 22.94. However, both companies' forward P/E multiples fall between 12 and 13. Abbott's price-to-sales ratio of 2.58 is also in the ballpark of J&J's ratio of 2.94.
While these values are not too far apart, J&J is more highly valued in each metric. Could the post-spin Abbott flock more closely to its larger peer? I doubt that will be the case -- at least not in early 2013. Investors will probably watch the new Abbott closely to see how well it performs without the powerful growth engine of Humira.
Of course, the important thing for investors to focus on really is whether the new Abbott can achieve solid long-term returns. On that question, I think the answer is that it can.
The company appears to have good growth prospects with its nutrition and diagnostics business in particular. Abbott's dividends should also continue to be quite attractive for long-term investors. Those two factors could be enough to keep investors chirping happily.
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