With the nation's shelves looking a bit too thin on baby formula products, Abbott Laboratories (ABT 0.63%) is in the hot seat. After voluntarily starting a recall of several of its baby formulas due to dangerous contamination issues in February, a national shortage quickly developed, as the Michigan-based factory operated by the company was one of the country's major suppliers of formula.
Now, people are rightfully worried about where to find the specialty formulas their children need. A nonstop flurry of headlines implicates Abbott Labs in a quickly escalating scandal. Should shareholders think about looking for the door, or will the baby formula shortage matter less to the company's stock price than it seems?
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Financial impacts are limited so far
Though less than a quarter has elapsed since the formula shortage began, right now, the damage to Abbott's base of revenue isn't something to worry about. In the first quarter, nutritional products accounted for a mere $1.9 billion of its total sales of $11.9 billion. For reference, sales of the company's popular BinaxNOW coronavirus antigen test kits totaled $3.3 billion, so it's important to recognize that formula isn't one of its major product segments. Of the revenue from the nutrition segment, only $847 million came from sales of pediatric formula products. Compared to the same quarter last year when there wasn't a recall, sales shrunk by 18.8% on an organic basis, which is quite sharp, but it's far from catastrophic.
Given that the recall started in February and Abbott reported its Q1 earnings in April, by now, there should be some evidence of the negative impact of the baby formula situation on its share price. But, the total return of its shares dipped by over 4.6% in the last three months, which is no worse than the market's drop of more than 6.3%. That might change if the formula shortage becomes even more painful for the public and criticism of the company's activities intensifies further, though.
Could the controversy continue to spiral?
There's a bit of a fork in the road for Abbott Labs at the moment. In one direction lies the prospect of a rapid return to normal levels of baby formula production as a result of ongoing conversations with regulators at the Food and Drug Agency (FDA) and taking corrective action based on their comments to prevent another set of formula contamination incidents. Once regulators confirm that the company is in good standing, production could resume in as few as two weeks, which would help to alleviate the shortage (and revenue shortfall) over the following months. In this direction, the shortage is a blip that causes some temporary damage to the business' reputation but doesn't inflict direct financial harm to shareholders or prevent the stock's upward march over time.
The other possible direction is more pessimistic, and it entails significant harm to its reputation as well as a high probability of mild but enduring financial harm. Down that road lies an escalation of public criticism of the business, potentially culminating in facing new regulations, lawsuits, and fines. High-profile figures like Pete Buttigieg, secretary of the Department of Transportation, have faulted the company's practices as one of the causes of the shortage.
Elected officials like Representative Rosa DeLauro also weighed in with pointed criticisms, citing reports from a former Abbott employee-turned-whistleblower who alerted the FDA to certain baby formula contamination issues at the Abbott plant a few months before the recall. And internet commentators are focusing particular scrutiny on Abbott's share repurchasing program, which they claim prioritizes shareholder returns over critical investments in manufacturing safety infrastructure.
Right now, things look like they're tipping toward going down the first path, as much of the ongoing spat surrounding the shortage isn't focused on Abbott itself but rather on adjacent (and overtly political) issues. But, any delay in resolving the shortage is guaranteed to exacerbate the situation, even if the delay isn't the company's fault, so shareholders aren't out of the woods yet.
