There were cheers for joy when Abbott Labs (NYSE:ABT) announced that it would split itself into two entities -- separating the device and diagnostics businesses from its pharmaceutical operation. Investors have waited a while to realize the value that this divergence would bring. However, what was once a "pre-split buzz" has now turned into a "post-split fizz," and investors are wondering what to do about the latter. I suppose we can say, investors are now "torn."
A tale of two halves
Now that the split, or spin-off, has taken effect, investors have become more drawn to the spun-off pharmaceutical company, AbbVie (NYSE:ABBV). As evident by gains of as much as 17% over the past two months, it seems AbbVie still carries the buzz. Meanwhile, this has left Abbott's remaining diversified businesses with no real catalyst for excitement.
However, though, shares of Abbott have grown 9% since the split. And investors shouldn't get too frustrated with the company just yet. Granted, there are still issues here that management needs to address to generate growth. That some of its prime drugs will soon go off-patent is one example. But it's clear that management realizes the urgency of execution.
Overcoming the Street's doubt
The company has been working for some time to streamline its operation, and there has been considerable progress. But I don't think the Street believes that Abbott can perform to a level that deserves a higher stock price or that it can compete effectively with the likes of Johnson & Johnson (NYSE:TEVA). Granted, Johnson & Johnson is much bigger, more established, and you can say J&J is better diversified.
However, from the standpoint of profitability and leverage, the difference between these two rivals is not that significant. The Street assumes that Abbott can't grow enough. I disagree. I will concede that there are risks here. But because of the recent split, some of these fears have diminished. And a more focused Abbott should yield better results. And if fourth-quarter earnings were any indication, management deserves a bit more time to execute.
These numbers were good, I think...
While I'm willing to give Abbott the benefit of the doubt here, it's not as if management went out of its way to help with a bullish thesis, either. Though the fourth-quarter and fiscal-year numbers looked decent (as reported), it was nevertheless unclear as to how Abbott performed since management didn't provide results that separates the "new Abbott" from AbbVie.
This only heightened the doubt that already existed about Abbott's prospects. But management still deserves credit for producing numbers that were broadly positive when compared to other med-tech peers -- in particular, Johnson & Johnson. Although fourth-quarter earnings arrived down 34.9% to $1.05 billion, or $0.66 per share, it was due to higher restructuring costs and an early debt payment of $858 million, which accounted for $0.54 per share.
When these costs are taken out, earnings actually arrived at $1.51 per share -- beating Street estimates by $0.01. Likewise, revenue advanced 4.4% to $10.84 billion. This is despite an unfavorable currency rate that lowered revenue by 1.2%. Even then, Abbott was still able to top Street estimates of $10.58 billion -- helped by a 10.2% increase in the nutrition business.
That said, the company now needs to diversify itself better since the split from AbbVie. While it's great that the nutrition business performed so well, it now accounts for roughly 30% of Abbott's overall revenue for 2012 when adjusting out the $18 billion pharmaceuticals revenue. This makes me feel uncomfortable. This over-reliance might become problematic down the road, especially since the rest of the results were mostly mixed -- aside from a 5.7% growth in the diagnostics business, there wasn't much to write home about.
OK, now what...
With a 1.7% decline in 2012 in device sales, a case can be made that Abbott is losing share to Johnson & Johnson, which just recently posted 13.7% growth in devices revenue, helped by J&J's Synthes acquisition. I'm willing to say this even though the devices business is broad in definition. But with the "new Abbott" now under way, investors should expect better relative results going forward. And for Abbott to get the Street to believe, management has to deliver against J&J, which is arguably the standard in the business.
To that end, management issued guidance that suggests that things will get better. For the full-year 2013, the company expects earnings of $1.39 to $1.45 per share. When excluding certain items such as cost-reduction, guidance picks up to $1.98 to $2.04 per share, which is higher than Street estimates for $1.95. Management seems more confident than the Street.
Be that as it may, it's worth noting here that when the full-year earnings-per-share is factored into the current price of $34, this pushes the P/E ratio to more than 16. This is no longer the very "cheap" territory, but given management commitment toward long-term growth, share buybacks, and dividends, there are much more risky bets out there.
Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.