Like many other large med-tech companies, Abbott Labs (ABT 0.76%) remains an exercise in frustration right now. There are pressures throughout most of the company's business lines, with only the diagnostics business really showing much growth. Although Abbott's results were a bit weak compared to expectations, analysts and investors knew that the company was going to go through this lull and longer-term expectations are still fairly bullish.
Hard to find the silver linings
Abbott reported sub-1% constant currency growth this quarter, a slight miss relative to expectations. Nutrition sales were down almost 2%, with a 4% decline in the U.S. offsetting a basically flat result outside the U.S. Established Pharma was down almost 1%, lead by weakness in developed markets. Diagnostics was the bright spot for growth, as sales rose more than 5%. Last and not least, device revenue growth was barely positive for the quarter.
Excluding amoritization expenses, gross margin declined 1.8 percentage points (1.5 percentage points with amoritization included), coming in as expected. Operating income fell 8% in the quarter, driving a nearly two-point beat on operating margin as both SG&A and R&D spending were lower than expected.
Diagnostics doing well
Abbott has been doing pretty well with its diagnostics business, and this quarter looks like no exception. Core lab and molecular diagnostic revenues were both up more than 5%. Roche (RHHBY 0.67%) recently reported sales growth of 9% in its "Professional" diagnostics segment and 4% in MDx, so I would say that Abbott is holding its own. One note of caution is on the immunoassay side – Roche saw 12% growth in this product line (part of Professional) in the first quarter, and this is an area where Abbott leads so it is worth watching how sales growth evolves over the next year or so.
Devices still dull
The wait goes on for Abbott's device business. Vascular sales were only up 1% this quarter as the company's coronary stent business in the U.S. declines (down 12%).
Diabetes was also quite weak, with a greater than 9% overall decline led by a nearly 28% decline in the U.S. This is even worse than the declines seen at Johnson & Johnson (JNJ -0.30%), as Abbott is positioned poorly to offset reimbursement pressures in testing with other revenue sources (like pumps). Roche was far stronger than either Johnson & Johnson or Abbott in diabetes this quarter, with North American sales up 13% due in part to an easier comp and new launches.
Optics was noticeably strong, as revenue rose 10% this quarter. Management attributed the strength to good sales of its cataract products, suggesting share gains from Novartis and/or Valeant's Bosch & Lomb.
The device business is still in "hurry up and wait" mode, or at least as it pertains to the vascular business. The company's Absorb stent is a promising product that could restore growth to the vascular business, but likely not before 2016.
The Bottom Line
Abbott is not doing so great on a growth basis today, but I do believe the company is structured for good long-term growth. The company has roughly 40% exposure to faster-growing emerging markets and there is a significant opportunity there to grow the nutrition and pharmaceutical businesses. I likewise believe that Abbott has solid optics and diagnostics businesses, though I'm concerned about the long-term outlooks for vascular and diabetes.
With that "it gets better" notion in mind, I'm looking for 5% long-term revenue growth from Abbott, with FCF growth in the low teens as the company better leverages past R&D and sales investments and improves the margins of its nutrition business. Those cash flow streams work back to a valuation of over $40 per share, making Abbott one of the cheaper-looking large med-tech names today.
