Please ensure Javascript is enabled for purposes of website accessibility

This Big Player in the COVID-19 Market Just Lowered Its Forecast. Should You Be Worried?

By Adria Cimino - Jun 3, 2021 at 6:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Demand for a key set of products is on the decline.

Coronavirus-vaccine makers have drawn most of the attention since the start of the pandemic and they've recently started earning revenue from their products. But there are companies that served the coronavirus market much earlier -- and have made billions over the past year. I'm talking about makers of coronavirus tests.

My favorite is Abbott Laboratories (ABT 0.90%). The company has generated more than $6 billion since the start of the pandemic from its COVID-19 diagnostics. But Abbott disappointed investors this week when it lowered its annual forecast.

Now the question is: Should you be worried -- or even avoid shares of this testing giant? Let's take a closer look.

A healthcare worker does a nasal swab to test a child for COVID-19.

Image source: Getty Images.

Old expectations, new expectations

Initially, Abbott expected to post 2021 earnings per share (EPS) of about $3.74. That's on a GAAP basis. Now it forecasts EPS in the range of $2.75 to $2.95. The company originally predicted adjusted EPS of at least $5, but today, the forecast stands at $4.30 to $4.50.

Here's why: Abbott says recent COVID-19 testing demand has been lower than expected. And it doesn't expect that trend to change moving forward. The company cites a decline in coronavirus cases, an increase in vaccinations, and the latest U.S. testing guidance for vaccinated individuals. Those who've been vaccinated don't require tests in certain situations, according to the Centers for Disease Control and Prevention.

This news may seem grim, but long-term investors shouldn't worry about Abbott's overall prospects. Coronavirus-testing revenue is a big plus for Abbott and helped compensate for declines in its other businesses during the worst of the pandemic. But even if coronavirus testing sales drop significantly -- or entirely at some point in the future -- Abbott's revenue picture is bright.

Prior to the pandemic, Abbott's medical-device business actually contributed the most to total annual revenue. The company separates its work into four businesses. The other three are diagnostics, nutrition, and pharmaceuticals. For the full year 2019, medical devices generated more than $12 billion in revenue. The four business units brought in a total of more than $31 billion.

The pandemic's impact

The pandemic hurt Abbott's ability to grow sales in these core businesses. For instance, some laboratories temporarily closed or postponed certain diagnostic tests, and hospitals worldwide halted nonessential surgeries.

The pandemic isn't over, but many healthcare facilities and labs have returned to normal operations. And we can see the results in Abbott's latest earnings report -- all businesses are growing. Within medical devices, 5 out of 7 specialties posted an increase in sales in the first quarter.

Of course, the ideal situation would be continued growth in COVID-19 testing and a recovery and growth in all business units. We saw that scenario in the first quarter, but a slowdown in coronavirus-testing sales is far from disastrous. What's most important is that Abbott's core businesses have recovered and are growing.

What does this mean for investors?

Abbott shares dropped more than 8% in one trading session after the company lowered its forecast, and I see this as a buying opportunity. The stock now is trading at 33 times trailing-12-month earnings, which is down from more than 60 about six months ago.

ABT PE Ratio Chart

ABT PE Ratio data by YCharts.

Over the long term -- with or without COVID-19 testing revenue -- I expect growth from Abbott. Last year, the U.S. Food and Drug Administration cleared the next generation of Abbott's star product, the FreeStyle Libre continuous glucose monitoring system for diabetes. That product and the Libre Sense (a biosensor to measure athletes' glucose levels) generated $829 million in the first quarter. And more than 3 million people worldwide now use the FreeStyle Libre.

Another important thing to note: Abbott isn't relying only on today's top products for future growth. The healthcare company's pipeline "continues to be highly productive," CEO Robert B. Ford said in this week's update. That should help drive sales in the years to come.

Abbott's overall growth story remains intact. And that means the shares have plenty of potential to climb over the long term.

Adria Cimino 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Abbott Laboratories Stock Quote
Abbott Laboratories
ABT
$111.48 (0.90%) $0.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.