The year 2013 proved to be a rather frustrating one for shareholders in Abbott Laboratories (NYSE:ABT). Indeed, shares were outperformed by the S&P 500, with the index delivering capital gains of 32% while Abbott Laboratories managed only 19%.
However, Abbott Laboratories was not the only Healthcare Equipment stock to be handsomely beaten by the S&P 500. Sector peers Baxter International (NYSE:BAX) and Edwards Lifesciences (NYSE:EW) fared worse than Abbott Laboratories in 2013, posting returns of 6% and -26%, respectively.
This trend has, encouragingly, not continued thus far in 2014, with Edwards Lifesciences and Abbott Laboratories ahead of the index in 2014 (+3.2% and +2.4%, respectively), while Baxter International is down 1.3% -- just behind the S&P 500's return of -0.2% year to date. Can Abbott Laboratories beat its two main rivals (and the index) in 2014?
An unfair 2013?
It's often said that the stock market looks beyond the current year's earnings. However, for Abbott Laboratories in 2013, this was certainly not the case. Earnings per share (EPS) in 2013 were around 46% lower than they were in 2012, but don't be fooled - this drop was actually due to Abbott spinning out its pharmaceutical division into AbbVie at the start of 2013. However, adjusting for this spinoff, Abbott's sales for the year came in slightly below expectations and earnings were in line with analyst estimates; these weren't the kind of results that generally gets investors excited about a stock.
Despite this, forecasts for 2014 and 2015 remain very upbeat, with Abbott Laboratories expected to deliver EPS growth of 9% in 2014, and 12% in 2015. Both of these numbers are well ahead of the average growth rate for S&P 500 stocks in 2014 and 2015, showing that Abbott Laboratories could still offer potential upside.
A tough 2013 for the sector
Indeed, it appears as though the market was focused on 2013 for Baxter International, too, as shares had a tough year. However, as with Abbott Laboratories, upside potential remains, because Baxter International is forecast to increase EPS by 10% in 2014, and by 6% in 2015, which does not yet appear to be fully reflected in the company's share price.
Meanwhile, Edwards Lifesciences saw profit in the fourth quarter fall by 17% versus the fourth quarter of 2012 as a result of higher selling and administrative expenses, as well as a charge related to severance expenses. In addition, EPS forecasts appear to be mixed for Edwards Lifesciences, with EPS forecast to drop by 4% in 2014 before rising by 16% in 2015, thereby giving an annualized rate of 5.5% in 2014 and 2015.
Although 2013 was a disappointing year for shareholders of Abbott Laboratories, with it underperforming the S&P 500, the future looks bright due to strong growth forecasts in 2014 and 2015. The same can be said for Baxter International, with strong growth expected to be delivered in 2014 and 2015 after a challenging 2013. Edwards Lifesciences, meanwhile, may struggle to keep pace with its two sector peers due to its lower expected EPS growth rate and dampened market sentiment after its tough fourth quarter.
As for whether Abbott Laboratories can beat Baxter International in 2014, its higher EPS growth rate in 2014 and 2015 (combined) give it a good chance, although there seems to be little to choose between the two stocks. However, both look set to have a strong 2014, and have a good chance of reversing their underperformance of the S&P 500 in 2013.
Editor's Note: A previous version of this article incorrectly stated that Abbott Laboratories' EPS dropped 46% year over year and did not take the spinoff of Abbott's pharmaceutical division into account. The article has been updated and the Fool regrets the error.