Is Abbott Labs Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Abbott Laboratories (ABT 1.00%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Abbott's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Abbott's key statistics:

ABT Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

ABT Return on Equity (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
We looked at Abbott last year, and the solid performance it strung together has since fallen apart -- the company's lost three passing grades to finish with only three out of nine possible passes. A major spinoff, which carted some lucrative drugs away with it, wrought major changes on Abbott this year, and evidence of that carnage can be seen all across its financial statements. Does Abbott have a few new blockbusters up its sleeve in its remaining product lines, or will this medical leader wind up as a generic substitute for the words "value trap" in the future? Let's dig a little deeper to find out.

Earlier this year, Abbott spun off AbbVie (ABBV 0.48%), which now manages Abbott's former branded-drug development business, but has retained its generic treatments, diagnostics, and medical-devices segments. Fool contributor Seth Robey points out that AbbVie is now highly dependent on blockbuster rheumatoid arthritis drug Humira, which now contributes more than 50% of AbbVie's sales -- but that means Abbott itself has lost a drug that generated $9 billion in annual sales. However, Humira's patent expiration in 2016 is a big reason why this deal was done, since Abbott's remaining segments are both less chunky and quite promising in their own right. Abbott's medical devices and diagnostic business outperformed rivals Johnson & Johnson (JNJ 0.41%) and Boston Scientific in the third quarter, thanks to solid demand for stent systems and laboratory products.

Fool contributor Dan Carroll notes that Abbott has heightened its investments in medical devices, where it sees opportunities for enormous growth. Quite recently, the company acquired vascular stent maker IDEV Technologies for $310 million, and also absorbed cataract surgical equipment maker OptiMedica for up to $400 million. Roughly 22 million cataract procedures will be performed in 2013, and the rising tide of aging baby boomers will certainly add to that total in the coming years.

These acquisitions will help Abbott reduce its reliance on the Xience drug-eluting stent, which currently leads the cardiovascular device market, but neither comes close to Johnson & Johnson's 2012 megadeal, in which the diversified medical giant paid $21 billion for orthopedics leader Synthes. Abbott's next-generation stent, Absorb, should also extend Abbott's dominance of the drug-eluting stent industry (even as the company diversifies), as it represents a technological leap over Xience. The company has already launched this stent in Europe, India and other overseas markets, and it recently commenced a trial to secure regulatory approval in Japan. Abbott should also benefit from its multi-year contract with Abaxis (ABAX +0.00%) for the distribution of portable clinical chemistry system Piccolo Xpress, and a single-use reagent disc, in China and the U.S. However, Abbott seems less inclined to push these products in China at present, which could cost it in the long run if it allows relationships with Chinese hospitals to lapse.

Putting the pieces together
Today, Abbott has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.