Medical-device company Abbott Laboratories (ABT -1.20%) reported impressive second-quarter earnings and raised guidance for the full year. COVID-19 diagnostic tests have given the company several quarters of strong earnings growth, but the performance of the underlying core business may give a better idea of future revenue prospects.

Strong COVID-19 and medical device sales

Abbott is one of the largest manufacturers of rapid COVID-19 antigen tests, offering personal and point-of-care testing to provide a real-time diagnosis of infection in less than 15 minutes. The sensitivity of its rapid antigen test compares favorably to the gold standard polymerase chain reaction (PCR) tests, identifying 14 of 15 individuals who are likely to be infectious. Overall, the company has sold more than 200 million rapid tests since April 2020. 

Despite Abbott's expectation that COVID-19 sales would sharply dwindle as the year progressed second-quarter sales remained robust. Global COVID-19 diagnostic revenue fell from $3.3 billion in the first quarter to $2.3 billion in the second quarter. This was well above expectations, causing the company to upgrade its full-year guidance for COVID diagnostic sales from $4.5 billion to $6.1 billion. 

Abbott has taken a conservative approach, estimating almost no revenue from this source in the upcoming months. This may set the company up for a nice upside if demand holds as new coronavirus strains emerge.

Some analysts anticipate that the global antigen test market will continue to expand, growing just under 7% annually to reach $8.3 billion by 2027. However, COVID-19 diagnostics sales are highly unpredictable, so there's no guarantee that this revenue stream will remain strong in the future. 

The company's large medical-device segment showed moderate 3% growth, driven particularly by the company's FreeStyle Libre continuous glucose monitor. The company claims that the most recent version, which was cleared for use in May, is the world's smallest and most accurate wearable glucose sensor, and the market seems to have responded. Sales expanded more than 25% in the second quarter.

On the pipeline front, Abbott received Food & Drug Administration (FDA) Breakthrough Device Designation to explore deep brain stimulation as a tool to manage severe depression. This pacemaker-like device regulates electrical impulses using electrodes implanted in the brain, which is an established technique for treating movement disorders.

Abbott's device has already been approved for Parkinson's. The company hopes that the technique might also prove invaluable for treating clinical depression in patients who have not responded to medication. 

Don't forget these headwinds

Abbott looks like it's on the verge of finally putting its struggles with baby formula behind it. The FDA wrapped up its investigation without uncovering a clear link between Abbott's facility and the contaminated infant formula that caused the illnesses. The site has now reopened after several weeks of downtime caused by severe flooding in the area, so production should resume in several weeks. 

But Abbott may find a more competitive market going forward. Manufacturers have expanded capacity, even as the FDA has cut red tape to increase imports from competitors to the tune of 720 million bottles of formula. This could increase the domestic supply of infant formula powder by about 30%, compared to 2021.

The company may also be impacted by the strengthening U.S. dollar, which has reversed from last year's lows to near its highest level in two decades. A strong dollar has the potential to dampen the value of international sales and is likely to impact Abbott since at least 60% of the company's full-year sales in 2021 came from overseas. Management expects this to come into full effect in the second half of the year.

Reasonable valuation

COVID-19 diagnostics, established pharmaceuticals, and medical-device sales were more than enough to offset the struggling nutrition segment. Overall, the company generated $11.3 billion in second-quarter sales, a 10.1% increase from the previous year. It also raised its full-year guidance for earnings per share from $4.70 to $4.90, based largely on the strength of second-quarter COVID-19-related sales.

Abbott's stock has declined about 20% this year, bringing it down from last year's high valuation to a much more reasonable forward price-to-earnings ratio of 23. Excluding COVID-19, management is guiding for near-term sales growth in the high single digits.

These numbers are in line with major medical-device competitors such as Stryker and Becton Dickinson. Right now, Abbott appears to be a reasonable investment option but not a bargain.