Healthcare giant Abbott Laboratories (ABT -0.65%) reported quarterly earnings numbers last month, and the results were impressive with net earnings rising by 37% year over year. While investors may be tempted to dismiss the results as being largely due to strong COVID-19 testing volumes, the company's other businesses also generated positive growth.
What was really impressive was the company's ability to keep its costs under control and bank a significant chunk of that extra revenue as profit. Here's a closer look at what was behind the strong quarter.
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Sales grew nearly 4% when factoring out COVID-19 testing
During the first three months of 2022, Abbott reported $11.9 billion in sales (up 13.8% year over year) with $3.3 billion of that coming from COVID-19 testing. However, other areas of its business also posted strong numbers.
Source: Company filings. Chart by author.
Diagnostics sales (which include COVID testing) led the way with 32% growth during the period, but both Abbott's established pharmaceuticals and medical-device segments also grew by more than 7% this past quarter. The only area of business that wasn't up from last year was the company's nutritional segment, where revenue fell by 7% due to a recall of products as well as adverse conditions in the Chinese market.
Company remained disciplined with expenses
Growth in the top line is great but can be negated if a company is spending recklessly. That isn't the case with Abbott, though, as keeping costs in check played a key role in its improved bottom line this past quarter. Its $1.4 billion increase in revenue, combined with strong gross margins of 58%, meant that gross profit rose by $853 million in the first quarter.
Meanwhile, its other operating expenses only rose by a total of 1.3%, allowing the bulk of the addition in gross profit to flow through to operating income. The only item to significantly chip away at the bump-up in gross profit was a higher tax bill.
Source: Company filings. Chart by author.
Although the summary of the company's earnings looks boring, that's exactly what value-oriented and even growth investors want to see. The discipline in the company's management is evident through its ability to keep costs stable, even while sales are rising.
The benefit for investors is that the company is now earning a greater profit margin. A year go, Abbott banked just under $1.8 billion in net income on revenue of $10.5 billion, or 17.1%. This past quarter, the profit margin jumped to 20.6%.
Is Abbott an underrated buy?
Year to date, shares of Abbott Laboratories are down 20%. That's a deeper decline than the S&P 500, which has fallen by 13% over the same period. At 26 times trailing earnings, the healthcare stock still isn't a cheap buy. The average holding in the Health Care Select Sector SPDR Fund trades at a multiple of 23 times profits.
Although there's a bit of a premium for Abbott stock, it may be justifiable, given the safety that it offers investors in the long term with its great margins. Plus, the Dividend King offers a yield of 1.7%, which is slightly better than the S&P 500's 1.4% payout. Abbott's business also generates billions in free cash flow every year and is likely to keep growing over time, so a modest premium today may look immaterial in the long haul.
