Most of us go to the doctor for a checkup once per year. Many of us visit our dentists twice per year. How frequently should our stocks receive a checkup? Frequently, but let's go with monthly for a start. With that in mind, this is our May checkup for Abbott Laboratories (NYSE:ABT) stock. Let's look at three important signs for Abbott's stock health.
The easiest way to evaluate a stock's health is to simply look at how shares are performing. In Abbott's case, 2013 is looking to be a pretty good year so far.
Abbott is beating the S&P 500 index for the year. However, May hasn't been quite as kind to the stock. Shares are down slightly, while the S&P 500 is up a little for the month so far.
How does Abbott Laboratories stock fare against its peers in health care? Let's use the SPDR Health Care Select ETF (NYSEMKT:XLV) as a proxy to represent the health-care industry as a whole. Stacked against its health-care brethren, Abbott misses the mark a little.
Whether we look at year-to-date or for the month of May, the SPDR Health Care Select ETF outperforms Abbott. This ETF is weighted more heavily with biotechs and brand pharmaceutical companies that have had great runs in 2013.
Even with a nice double-digit rise in 2013, Abbott's valuation looks pretty good at first glance. The stock's forward price-to-earnings multiple currently stands roughly mid-way between 16 and 17. However, that figure exceeds the S&P 500's forward P/E of below 15.
Looking at peers gives us a better clue about how fairly Abbott's stock is valued. In terms of expected revenue, Eli Lilly (NYSE:LLY) should stack up well against the company. Lilly's forward P/E of 20 makes Abbott look relatively inexpensive by comparison.
Of course, the business models of the two companies are quite different, particularly after Abbott's spin-off earlier this year of AbbVie. Lilly's business focuses on brand pharmaceuticals and animal health. Abbott's business segments, though, now include nutrition products, medical devices, diagnostics products, and established pharmaceuticals (i.e., generic drugs.) These differences make any comparison between Abbott and Lilly less meaningful, despite the similar sales levels of the two organizations.
Johnson & Johnson (NYSE:JNJ) compares more favorably in terms of business models. J&J has both medical devices and diagnostics business segments like Abbott does. Its consumer products segment includes some nutritional products. J&J markets brand pharmaceuticals, though, unlike Abbott's generic drug focus.
So how do Abbott and J&J match up on valuation? J&J's forward P/E stands at 15. Abbott looks a little more expensive using this metric.
Even this comparison has flaws, though. J&J's annual revenue of more than $67 billion last year nearly triples the expected revenue of Abbott. Also, while there are similarities between some of the two companies' business segments, distinct differences also exist.
S&P Capital IQ calculates the fair value of Abbott Laboratories stock at slightly more than $43 per share. If this value is relatively accurate, Abbott shares are currently undervalued by around 16%.
Nutrition products stands out as Abbott's key growth engine. This segment saw sales jump 8.7% year-over-year in the first quarter. Sales of diagnostics also grew by 4.4% compared to the same quarter in the prior year.
However, Abbott's other segments aren't faring as well so far in 2013. Established pharmaceuticals sales dropped 1.9% year-over-year during the first quarter. Medical devices sales declined even more, with a 4.6% decrease relative to the same period in 2012.
I suspect that Abbott can continue to see solid single-digit growth overall. Emerging markets should continue to drive strong growth, particularly in nutrition and established pharmaceuticals.
How healthy is Abbott Laboratories stock as of May? I'd say the patient looks to be in reasonably good health.
You can't complain too much with any stock that outpaces the S&P 500. The stock also still appears reasonably valued with a decent outlook for growth. I rate Abbott Laboratories stock as a buy -- at least for now.
Fool contributor Keith Speights owns shares of SPDR Health Care Select ETF but has no position in any other stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.