Abbott Laboratories (ABT 0.52%) has been one of the better performing large-cap healthcare stocks on the market, although many years ago the company was going through a major change. Back in 2013, Abbott's drug business ended up splitting off from the firm to form a separate company called AbbVie. In this split, AbbVie maintained ownership of a number of blockbuster drugs, the most notable being Humira.
Despite the loss of these blockbuster drugs and their impressive revenue figures, Abbott has grown at a steady rate. With the company's market cap more than doubling over the past few years and now reaching $154.5 billion, how much more room does Abbott Laboratories have to grow? Most would agree that the company's future remains bright, although growth might slow down.
To get an idea of where Abbott will be in five years, let's look into what's fueled its impressive growth over the past few years and what's going on now.
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Abbott's track record of success
The history of Abbott Laboratories goes back to 1888, when Wallace Calvin Abbott started it as a one-man operation. Forty-one years later, the company went public on the Chicago Stock Exchange in 1929. Since then, it has become one of the top dividend stocks in the country, with a 95-year history of paying out dividends and a 47-year period of consecutively increasing its payouts.
Abbott's largest business is its medical device segment, which includes medical devices for patients with cardiovascular disease and diabetes. This division accounted for 37% of the company's 2018 revenue, approximately $11.4 billion in total.
What's particularly impressive is that the annual growth rate of Abbott's medical device business has consistently hovered near the 10% mark, thanks to some of Abbott's recent acquisitions. The most notable one was the $25 billion St. Jude Medical acquisition in 2016, another medical device maker that created devices in the cardiovascular and diabetes markets.
Abbott's next two drivers of revenue are its diagnostics segment and nutrition business, which accounted for 25% and 24%, respectively, of its 2018 revenue. However, Abbott has its own established pharmaceutical business, as well, selling branded generic drugs that, while not as exciting, still remain a lucrative market. This segment accounted for 14% of Abbott's 2018 revenues.
Recent financial results
Looking at Abbott's Q3 2019 quarterly results, there aren't any major warning signs to be found. Total third-quarter revenue came in at $8.1 billion, with $5.2 billion coming from international markets. The best single business segment for Abbott has been its international medical device business, which reported an impressive 14.3% increase in organic sales, compared to Q3 2018.
Overall, all of Abbott's business segments have been doing well, with net income increasing by 70.3% over the past year from $563 million in Q3 2018 to $960 million as of the current quarter. Medical device sales rose by 10.6% compared to Q3 2018, while established pharmaceuticals, diagnostics, and nutrition all rose by 7.9%, 6.6%, and 3.8%, respectively. All these results are pretty much in line with analyst estimates, and Abbott's management expects to hit the upper end of its guidance target for the end of the year.
As for specific product lines that are doing well, Abbott's Freestyle Libre continuous glucose monitoring (CGM) technology, which helps manage glucose levels for people with diabetes, saw sales jump by 67.6% over the past year, making it one of the fastest-growing products in Abbott's lineup. The company also has a new MitraClip product, which is used by heart surgeons in repairing the mitral valve, which plays a crucial role in moving blood in and out of the heart. Sales have gone up by 31.9% since Q3 2018.
Abbott made a couple of major acquisitions over the past few years. In 2017, it paid a sum of $30 billion to buy St. Jude Medical and diagnostic test-maker Alere. Since then, however, the company has continually paid off much of its long-term debt, which has decreased from $27.2 billion in Q4 2017 to $17.6 billion as of Q3 2019.
Specific predictions for 2025
One thing to note is the planned departure of Abbott's longtime CEO Miles White. With 21 years under his belt as the chief executive for the company, it's reasonable to attribute a good portion of Abbott's steady success to his leadership. Replacing him will be Robert Ford, Abbott's current Chief Operating Officer, who was named by White as his top pick for who to replace him. Ford is only 48 so it wouldn't be surprising if he stays in this role well into 2025 and beyond.
In terms of specific segment predictions, medical device sales will remain Abbott's bread and butter, and will likely continue to grow at a faster rate than major competitors. Johnson & Johnson and Medtronic both have larger medical device businesses than Abbott. However, both of these company's businesses are growing at a slower rate. Johnson & Johnson saw 5.3% growth in its medical device business over the past year (excluding acquisitions and divestitures), less than half of Abbott's 10.6% growth rate. Medtronic grew even less, only a 4.1% increase in organic sales.
By 2025, I predict that Abbott will continue to gobble up market share from its larger competitors thanks to its faster growth rate, but still won't eclipse either Johnson & Johnson or Medtronic in this area just yet. Annual medical device sales of as much as $22 billion is possible by the end of 2025, but even a more conservative $17 billion would be impressive
As for its second-biggest segment, established pharmaceuticals, Abbott falls quite a bit short when compared to the size of other company's established pharmaceutical businesses, such as Sanofi and Pfizer. Considering that Abbott is a medical device maker first and foremost, this isn't really surprising. What is impressive, however, is that Abbott's business is growing where others are shrinking. Sanofi's established pharmaceuticals business revenue shrank from $13.5 billion to $12.2 billion between 2016 and 2018, while Pfizer's fell from $11.2 billion to $10.5 billion over the same period. Abbott's, on the other hand, grew from $3.9 billion to $4.4 billion between those two years.
Abbott won't eclipse these drugmakers any time soon, but by 2025, it will have grown by a fair bit assuming its current growth rate stays the same. It wouldn't be surprising if revenues from this business segment cracks $7 billion annually.
What's the verdict on Abbott?
There's not much to say that's negative about Abbott. It's a large-cap healthcare stock that's been around for many decades, so it's impressive that the company is growing its revenues this quickly while providing a consistent dividend.
Over the next five years, I expect the company to continue to increase sales, pay off debt, and widen its net margin. While the stock doubled between 2014 and 2019, I'm not sure if it's going to do so again by 2025 or if growth will slow down a little, especially since doubling again would put the company's market cap at a whopping $300 billion. What is clear, however, is that this healthcare giant shows no sign that it will stop growing anytime soon.
