You might not immediately think of Abbott Laboratories (ABT 0.55%) as a coronavirus stock. The company is well diversified -- with medical devices, diagnostics, nutrition, and pharmaceutical businesses. In fact, medical devices usually contribute the most to Abbott's revenue. Still, Abbott became a coronavirus stock after winning authorization for 12 COVID-19 diagnostics last year.
The tests brought in billions of dollars. And Abbott shares climbed. But Abbott stock sank more than 9% in one trading session back in June when the company lowered guidance. The bad news? Demand for coronavirus tests had started to sink. These days, however, the picture has changed. It's changed so much that Abbott may be facing a billion-dollar opportunity...
The situation in June
First, let's look back to the situation in June. Coronavirus cases had been dropping since the start of the vaccination rollout. The number of daily new cases for the first time had fallen to as low as the numbers back in March of 2020 -- when the crisis was just starting. As a result, demand for testing declined. States closed some free testing sites, and Abbott cut production of its tests.
Then, only weeks later, coronavirus cases surged once again. The delta variant, which originally wreaked havoc in India, was gaining ground in the U.S. Hospitalizations and deaths also started to rise. States rushed to open testing sites.
Most recently, CVS Health pharmacies limited the number of at-home tests people can buy as demand skyrocketed. CVS' limit applies to Abbott's BinaxNOW test -- currently in short supply.
Demand for laboratory-based COVID-19 tests has soared to 1.5 million per day in mid-August from 250,000 per day six weeks earlier, Reuters reported.
So, what does this mean for Abbott? Initially, it's going to result in costs to ramp up production. But overall, the increase in demand for tests is a billion-dollar opportunity for the company. In the fourth quarter of last year, Abbott generated $2.4 billion in COVID-19 diagnostics sales. It's important to keep in mind that the BinaxNOW laboratory test earned authorization in August 2020 -- and the at-home version of the test won authorization at the end of the year. That timing limited their contribution to full-year earnings.
Elements supporting demand
Moving forward, these rapid tests could add more to Abbott's earnings. Right now, many elements are pushing people to get tested. First and foremost, growth in the delta variant. Experts anticipate other variants to follow. The demand for testing may ebb and flow as cases rise or fall -- but considering the regular emergence of variants, I don't see testing demand dropping permanently anytime soon. And after seeing how quickly the delta variant gained ground, governments may become more proactive about ordering tests to prepare for future strains.
The other elements supporting demand? Testing requirements from schools and workplaces. And requirements for travel. Many of these places/situations now request the presentation of a negative COVID-19 test.
All of this means coronavirus testing wasn't just a temporary boost to Abbott's sales figures in 2020. The laboratory and at-home test kits could become a revenue source for many quarters to come. The main challenge for Abbott will be managing the production of its tests. As mentioned above, demand won't be a steady line higher. In the coming months, though, I would expect strength in testing -- thanks to the various sources of demand I've talked about.
Abbott shares have recovered since their big one-day drop back in June. The stock is now up 15% so far this year. The rest of Abbott's businesses are booming. In the latest earnings report, all four of the company's businesses showed double-digit revenue growth. And total sales rose more than 12% year over year -- that's excluding coronavirus testing sales. Considering the performance of all of Abbott's businesses, I'm optimistic about the shares over the long term. The coronavirus testing opportunity is big -- but for a company as strong as Abbott, it's just the icing on the cake.