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Is Abbott Labs Stock in Trouble?

By David Jagielski – May 24, 2020 at 6:32AM

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Questions surrounding the accuracy of its COVID-19 tests could cause problems for the company.

The coronavirus pandemic has caused problems for the economy as a whole, but it's also created many opportunities for healthcare providers. With more than 5 million cases of COVID-19 now around the globe, one area where there's been significant demand has been in coronavirus testing. In March, Abbott Laboratories (ABT 0.29%) launched a coronavirus test that the company said could deliver results in just five minutes. However, a recent study is questioning the effectiveness of that test, and that could be bad news for the stock.

Researchers call the test "unacceptable"

A study out of New York University (NYU) is raising serious concerns around just how accurate Abbott's ID NOW test is in detecting COVID-19. Researchers found that the Abbott test was not nearly as accurate as another test from private company Cepheid. Of the positive results that Cepheid's test detected, the Abbott test showed a negative result 48% of the time.

The White House has spoke highly of Abbott's test in the past, but infectious disease expert Dr. Peter Hortez has doubts about it, saying that "The White House might have to call an audible and switch tests." One of the reasons that he's concerned about the results: The patients who had positive results on the Cepheid test also had COVID-19 symptoms.

People working in a lab.

Image source: Getty Images.

Should investors be worried?

Many companies are working on vaccines and tests for the novel coronavirus, and if Abbott's tests aren't effective, health officials will have many other alternatives to choose from. On March 27, the Food and Drug Administration (FDA) granted the test emergency use authorization, but it is now looking into the NYU study, which isn't peer-reviewed.

If the FDA finds a problem with the test and revokes the authorization, it'll be a problem for Abbott, which says it's distributed 1.8 million tests thus far. With demand for testing still high, that could lead to some underwhelming financial results later this year if health officials prevent the distribution of more tests. However, it's too early to tell whether that will happen. For one, Abbott claims its reported false-negative rate is just 0.02%. The company also says the NYU study did not always utilize a viral transport medium for the specimens, which the company says could impact its tests.

Until there's a definitive answer from the FDA, investors shouldn't be sounding the alarm bells. The NYU study involved a fairly small sample size, and if the tests weren't administered correctly, that would undermine its accuracy. At the very least, it would suggest that another study should be done, one that closely follows Abbott's instructions on how to correctly carry out the tests. Based on the information that's available right now, there doesn't appear to be a reason for investors to be concerned just yet.

Is Abbott a Buy?

Year to date, shares of Abbott are up a modest 3% -- still better than the S&P 500 index, which is down 8% in 2020. On April 16, the company released its first-quarter 2020 earnings, which showed organic sales up 4.3% from the prior-year period. Abbott saw particularly good numbers in pharmaceuticals, where organic sales growth was 9.3%, as well as in nutrition, which saw year-over-year organic growth of 7.3%.

Over the past 10 years, Abbott's been a fairly stable company, posting a profit margin of at least 10% in the majority of those years. In 2019, 11.6% of its top line fell through to the bottom. Abbott also produced modest sales growth of 4.3% last year.

Unfortunately, with the stock trading at more than 40 times its earnings and a price-to-book multiple of 5, Abbott's just too expensive to buy today. And although it's a Dividend Aristocrat and has raised its dividend for 48 years in a row, its 1.6% yield remains modest, well short of the 2% that investors can get with the average S&P 500 stock.

COVID-19 may inject a lot more growth into Abbott's sales in the near term, but with many companies working on tests and vaccines, it may not lead to a big bump-up in the company's top line when all is said and done. And with Abbott shares' high valuation and low dividend yield, there's no other compelling reason to buy the healthcare stock today.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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