Investors have been bullish on Abbott Laboratories (ABT 2.70%) this summer, especially since Aug. 26, when the U.S. Food and Drug Administration (FDA) granted the company's BinaxNOW COVID-19 rapid test an emergency use authorization (EUA). Not only can the test produce results in as few as 15 minutes, but it's also very affordable, costing just $5 a pop.
The EUA is great news for the Illinois-based company, and means that Abbott Laboratories should experience continuous demand as long as the number of coronavirus cases continues to prove a problem for the U.S. and other countries around the world. But with shares of Abbott already up about 20% this year (the S&P 500 is up around 5%) and recently hitting new highs, investors may be wondering if they've missed the boat, and if it's too late to invest in the stock.
Abbott's coming off a strong quarter, and its numbers could get even better
On July 16, Abbott released its second quarter results for the period ended June 30. and reported earnings and revenue above analyst expectations. Although it was a difficult period for the economy, in which many businesses were shut down and had a difficult time getting products in front of consumers due to stay-at-home orders, Abbott's net sales of $7.3 billion were down a relatively modest 8.2% from the same period last year.
Image source: Getty Images.
One of the reasons the company could continue performing is its diagnostics segment. While its other segments were either down or showed negligible growth, sales of its diagnostic products rose by 4.7% to just under $2 billion for the quarter. The company noted organic growth of 7.1%, crediting strong demand for its COVID-19 tests. As of Aug. 14, Abbott said that it's shipped over 13 million antibody tests in the U.S., 6 million molecular lab tests, and 7 million rapid ID NOW tests.
As life slowly returns back to normal in some areas of the country and hospitals begin to increase their number of elective procedures, demand for Abbott's medical devices should improve. This reopening could drive even better results later this year and make up for early woes. In the second quarter, medical device sales dropped by 21.2%. This was Abbott's hardest hit segment during the period. The medical device segment makes up the bulk of Abbott's total revenue, representing one-third of its top line, making its overall revenue results even more impressive.
The stock is expensive, for now
While Abbott shows a lot of promise in the coming quarters, it's hard to look past its high valuation. Today, investors are paying almost 60 times Abbott's earnings to own a piece of the company. It's a steep multiple, and the highest it's been in the past year:
ABT PE Ratio data by YCharts
However, as Abbott's financials grow stronger, that multiple will come down -- should its share price stay around where it is today. And there's reason to be optimistic that profits will rise as hospitals take on more medical procedures and as more people gain access to its COVID-19 tests. Last month, President Donald Trump announced that the government would purchase 150 million rapid antigen tests, dubbed BinaxNOW, from Abbott.
The company is also looking to expand the FDA authorization of BinaxNOW so that it can test people who are asymptomatic. Under the current EUA, only people with symptoms can use the test. Abbott is currently undergoing trials to see how accurate and effective the test is for people who show no symptoms of the virus. An expansion of the EUA could lead to even more testing, and much more revenue growth -- which, in turn, would create a stronger bottom line. In the second quarter, Abbott reported net earnings of $537 million -- down 46.6% from the prior-year period.
While the stock is definitively trading at a premium today, as things get back to normal and with testing numbers (hopefully) rise, its current share price could look cheap in a few months from now.
Why the stock's still a buy today
Abbott Labs is proving itself a leader when it comes to COVID-19 testing, earning the trust of the federal government and shipping tens of millions of tests across the country. Demand for those tests isn't going to disappear, and that makes Abbott a good stock to grab in the middle of the pandemic.
Even if you aren't sold on the stock's price tag today, don't forget that it's also a Dividend Aristocrat, and it can add a regular stream of income to your portfolio. Last year, the healthcare company raised its quarterly dividend payments for the 48th year in a row, up to $0.36. Today, investors can earn a yield of 1.35%. While that's below the S&P 500 average of around 2%, it's still a good way to pad your overall returns from owning the stock.
Whether you're looking for growth or dividend income, Abbott Labs can make for an attractive buy today. It's a safe stock that can offer some stability in the midst of a volatile market space.
