Abbott Laboratories (ABT -0.84%) is a top healthcare stock that's been in the news recently for its role in the U.S. baby formula shortage. It's the biggest supplier of Similac, and manufacturing challenges have affected consumers across the country. But the company is now restarting its operations at its Michigan plant. And there's more good news -- it recently obtained approval from the Food and Drug Administration for its next-generation glucose monitor.
The healthcare stock is down more than 17% this year, worse than the S&P 500's 13% drop. Could Abbott be a good buy right now, in light of these recent developments?
Image source: Getty Images.
Pediatric nutrition sales fell more than 20%
When Abbott reported its results for the first three months of the year, it noted that it initiated a voluntary recall of infant formula products in February. The result was a troubling result for its nutrition segment, where sales of $1.9 billion declined by 7% year over year. Pediatric nutrition sales were the driving force behind the decline, as they fell 21% worldwide and 34% in the U.S. market.
Lagging nutrition revenue, however, wasn't enough to drag down the company's results. Strong growth in all of Abbott's other businesses, including diagnostics and medical devices, made up for declines in nutrition. The company's sales of $11.9 billion across all of its segments meant the business still grew at a rate of 14% year over year.
Earlier this month, however, the company resumed its operations at its plant in Michigan, where it makes baby formula. Months earlier, it was shut down amid concerns about contamination and infants who were getting sick, which led to the recall. The news will come as a relief to consumers struggling to find baby formula, and it will also help stop the bleeding for the company's nutrition segment.
And that's not the only piece of good news for Abbott investors.
FDA approves the FreeStyle Libre 3
On May 31, Abbott announced that the FDA cleared the company's continuous glucose monitor (CGM), the FreeStyle Libre 3, for any diabetic aged 4 and older. The company calls it a "game changer" and says that people with diabetes will "be able to manage their health minute-by-minute with the world's smallest and thinnest sensor and most accurate 14-day continuous glucose monitoring system."
The company's diabetes care segment contributed $1.1 billion in revenue last quarter, with sales rising by 15% year over year. The company noted that its FreeStyle Libre products accounted for $1 billion of that revenue and rose by more than 20% year over year. Introducing a newer, thinner, and more accurate product in the Libre 3 could help generate even more growth for that area of its operations. Of Abbott's medical-device revenue, which totaled $3.6 billion in Q1, diabetes care accounted for close to one-third of that total.
Should you invest in Abbott Labs?
Abbott's Q1 results demonstrated the company's resilience and strong diversification in being able to deliver strong numbers despite adversity in its nutrition segment. Now that those issues look to be resolving themselves, and with the company getting a nod from the FDA for a new CGM for the U.S. market, there are catalysts that could help drive better numbers in future quarters.
And that could be key as Abbott will see a slowdown in testing revenue. COVID-19 testing sales still contributed a hefty $3.3 billion to the top line last quarter, and that number is likely to be much smaller in future periods. The company said in its Q1 earnings report that it expects the bulk of the $4.5 billion it forecast in COVID-19 testing revenue for 2022 to come in the first part of the year.
The big question is how all these pieces play out. Even with a resumption in baby formula manufacturing and a potential boost from a new Libre device, it seems unlikely that Abbott's quarterly revenue will be higher in subsequent quarters than it was in Q1 as the loss in COVID-19 testing sales could leave too large of a hole to fill.
That makes it even more difficult to justify the stock's valuation, as Abbott trades at a forward price-to-earnings multiple of 24. That's much higher than the S&P 500's forward earnings multiple of 18. Although Abbott is a solid long-term buy, I'd wait for more of a decline before buying the stock, as there are much better deals out there for investors right now.
