6-Month Checkup on the New Abbott Laboratories Stock

Technically, Abbott Labs (NYSE: ABT  ) has been around for decades. But the new Abbott Laboratories stock -- the one that no longer contains the drug division spun off as AbbVie (NYSE: ABBV  ) -- has existed for only six months.

Seems like a good time for a checkup.

What's left?
After sending the drugs, including the world's best-selling drug, Humira, to AbbVie, Abbott is left with four divisions:

  • Nutrition -- probably a low-margin business. How much can you mark up baby formula and muscle powder?
  • Diagnostics -- interesting, especially with the development of personalized medicine, but it's the smallest of the four globally, and very little of the sales come from the U.S., where it could probably get higher prices. 
  • Established pharmaceuticals -- using a euphemism for generic drugs sold overseas, doesn't make them any more interesting.
  • Medical devices -- it's a tough business. U.S. sales were down nearly 13% year over year in the first quarter.

Uninteresting
The reason Abbott split off AbbVie was clear: Independently, Abbott Laboratories stock and AbbVie stock were supposed to grow faster than the combined company.

That might actually turn out to be true, but Abbott got the unsexy slow-growth side of the stock. Since the split, Abbott Laboratories stock has matched the S&P 500, while AbbVie has doubled the index's return.

ABT Chart

ABT data by YCharts

It seems investors are just uninterested in owning Abbott Laboratories stock. I know I am.

Turning things around
The most interesting division is Abbott's diagnostic business. The company sells devices that can run different diagnostic tests. Abbott doesn't break out margins, but it seems safe to assume it's making more on the tests than it is on the machines, which has proved to be a successful business model. Investors should keep an eye on the ever-increasing options for tests that Abbott is developing. It recently gained FDA approval for a test to genotype hepatitis C infections, for instance.

The medical-device business is key to the operation of Abbott Laboratories. Sales of its drug-eluting stents and related products business were down 15% in the U.S. as the company not only competes against Boston Scientific (NYSE: BSX  ) and Medtronic (NYSE: MDT  ) , but also against other options that patients have to treat coronary arteries, including doing nothing. Sales of drug-eluting stents at all three medical-device makers have dropped recently as doctors perform fewer procedures. The winner appears to be Johnson & Johnson (NYSE: JNJ  ) , which exited the drug-eluting stent business altogether two years ago.

Growth in the other two divisions -- nutrition and established pharmaceuticals -- will help boost the revenue line, but don't be surprised to see the growth not translate to the bottom line, since they're probably the lower-margin businesses. To get things turned around, the diagnostics and medical-device businesses have to be firing on all cylinders.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 01, 2013, at 9:48 AM, seifrij wrote:

    What kind of idiot analyst says "...since they're probably the lower-margin businesses....". Doesn't he have the sense to do actual investigating? In fact, these two divisions for Abbott return the overall highest margins.

    Gross margins for Q1 2013 were reported at 56%. Nutrition and Established Pharma are more than 60% of the total revenue..... any fool can do the math!

    What a shame that someone like this gets to post more useless FOOL dribble....

  • Report this Comment On July 01, 2013, at 5:28 PM, PEStudent wrote:

    sekfrij - try not to confuse "gross" and "operating" margins. The gross margins do not take into account the costs of selling, general and administrative expenses, interest expenses and distributions to shareholders. The operating margin is also referred to as the "net profit margin" and that's the one that really gives you the bottom line.

    Note that Abbott itself says it is trying to raise operating margins from the low teens to 20%+ by 2015, according to its 1st Qtr 2013 report (http://www.abbott.com/press-release/abbott-reports-firstquar....

    Since you're clearly not on top of it all, and apparently are relying on 3rd party statistics (Nutritional and Established Pharma are NOT over 60% of sales, they are 54.5% of sales, Q1), I suggest you refrain from calling the writer severe names. Perhaps it might help to assume you don't know it all.

  • Report this Comment On July 01, 2013, at 5:29 PM, PEStudent wrote:

    Nice report, Brian, but I think you badly underestimate margins on Nutrition and maybe overestimate them on Diagnostics.

    Nutritionals went from 28% margin in 2006 down to 13.3% in 2011, apparently similar in 2012, and Abbott's 1st Qtr 2013 report says (http://www.abbott.com/press-release/abbott-reports-firstquar... "Nutrition operating margin significantly improved over the first quarter 2012, as this segment continues to execute on its plan to expand its full-year operating margin to 20 percent of sales by 2015."

    In Abbott's worldwide diagnostics business, margin improvement continued to be a key focus and operating margins increased from 14.7 percent of sales in 2010 to 18.7 percent in 2012.

    About Diagnostics, the same 1st Qtr reports says: "Diagnostics operating margin significantly improved over the first-quarter 2012, on track to exceed its full-year target of 20 percent of sales by 2015."

    That would indicate that the Nutritionals margins are about 2/3 the Diagnostics margins and expected to match it by 2015. Nutritional Sales were, in Q1, $1.699B (8.7% growth over 2012) compared to Diagnostics $1.088B (4.4% growth over 2012).

    That would indicate that not only do Nutiritional provide about 25% more profit than Diagnostics, but the GROWTH in Nutritional Profit in dollar terms is also greater than Diagnostics.

    Note that other companies like Mead Johnson Nutrition had 21% margins as recently as 2011 and one of Abbott's key goals upon breakup was getting the Nutrition margins up.

    There is so much demand in China and India for SAFE, Western, baby formula that the UK has limited how many packages people can buy so that their exports can stay high.

    Similac's sales are leading the way in those countries and will provide for good potential growth for some time.

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