Abbott Laboratories (ABT -0.03%) investors have plenty to be happy about when they look at the company's recent earnings report. Revenue is climbing in the double digits in three of the company's four businesses. Its coronavirus testing sales soared to $3.3 billion in the quarter. And product approvals are set to drive future revenue.
But there's one dark cloud amid all of this sunshine. And that has to do with a recent product recall in Abbott's nutrition business. In fact, this recall is the reason Abbott lowered its annual revenue growth guidance to the mid-to-high single digits from the high single digits. This is the worst news to hit Abbott in the first quarter. Now, let's talk about why you shouldn't worry too much about Abbott's future.
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A product recall
First, a bit of background on what happened. Early in the quarter, Abbott launched a voluntary recall of certain infant formula products produced at a plant in the United States. This followed cases of bacteria cronobacter sakazakii and salmonella in some infants who had taken the formula.
Abbott found traces of certain bacteria in non-product contact areas of its factory. But they didn't match the samples that came from the customers who had complained. No salmonella was found in any part of Abbott's facility -- and the U.S. Food and Drug Administration (FDA) cleared the company of any link to the salmonella cases. Abbott also holds onto samples of products shipped -- and all of these tested negative for the bacteria involved in the infants' illnesses.
Today, Abbott is working with the FDA and hopes to reopen its facility as soon as possible. Meanwhile, Abbott is shipping product to the U.S. from its FDA-registered factory in Europe. That's to help relieve an infant formula shortage that was worsened by the recall.
It's clear the news is upsetting for everyone because babies have been sickened or died.
Now, let's look at the situation from a financial standpoint. The news is negative because the recall is weighing on Abbott's earnings right now. But here is why, as an investor, you shouldn't worry about Abbott down the road. First, it's reassuring to know that testing so far hasn't detected a link between the cases of illness and Abbott's facility and product. Any link to such a contamination could be catastrophic for future sales. But Abbott's thorough investigation and the results of its tests should ease parents' worries. And that means Abbott's future formula sales shouldn't suffer.
Abbott's future prospects
Second, the recall is a temporary situation. It will weigh on Abbott's earnings this year. But it doesn't damage Abbott's future earnings prospects. In fact, Abbott said that if we remove the positive impact of its coronavirus test sales and the negative impact of the product recall, the company is seeing 11% growth. And as I mentioned earlier -- excluding the nutrition business due to the recall -- all of Abbott's other businesses posted strong revenue growth in the first quarter.
So, let's imagine what the future may look like for Abbott. Coronavirus testing revenue may weaken in a post-pandemic world. But it still could remain significant. And Abbott's medical device business -- after suffering during part of the pandemic -- is already growing again. This is key because this unit was the biggest contributor to revenue in pre-COVID days. Once the pandemic is over, medical devices may once again become the biggest revenue engine for Abbott. And by this time, the recall woes likely will be over. The nutrition business might be on the road to recovery.
All of this means Abbott shareholders should sit tight and focus on the company's future. Abbott is handling the recall well. The situation is costly for the company today -- but the good news is if Abbott isn't linked to the illnesses, the recall won't tarnish Abbott's reputation. And that's why you shouldn't worry about Abbott over the long term.
