Owning shares of diversified health-care company Abbott Labs (NYSE:ABT) hasn't been the most rewarding experience this year. Sure, you get that dividend like clockwork, but the stock has gone nowhere fast over the last 12 months. In fact, it has gone down pretty fast in the last three months or so.
And it's not like investors have gotten a lot of good news lately, either. The company disclosed late last week that the Food and Drug Administration had issued a non-approvable letter for the experimental prostate drug Xinlay -- not exactly a surprise given a panel's unanimous recommendation against approving it. On top of that, Abbott Labs had to put out a cautionary notice for users of its blood glucose meters because some users were accidentally and unknowingly switching the measurement readout (from the normal mg/dL to the less commonly used mmol/L).
At least the company's third-quarter financials were OK. Mostly. Sales climbed 15% on a broadly positive performance in pharmaceuticals, nutrition, diagnostics, and medical products. Margins, though, were still problematic. In large part because of low-margin sales of the Mobic drug, gross margin fell again on a year-over-year basis.
Making matters somewhat more complicated, there were some items in the quarter that resulted in a 15% lower net income result. Abbott Labs took a $203 million charge for initiatives to reduce costs (as expected) but also had charges for bad debt reserves, acquired research and development, and various integration expenses. With the charges, earnings per share were down 14% versus last year, while subtracting those charges leads to 9% EPS growth.
A few quarters back, I pointed out that patient shareholders could likely wait for Abbott Labs' stock to come to them because it had an uncanny history of the trailing P/E dipping below 20 at least once a year. Well, guess what? We're below 20 again now.
The key to whether you should buy this stock depends on what you think the company can do in terms of earnings growth. If you believe it can accelerate growth back to a level of about 11% or so, it looks like an interesting idea. At single-digit rates (even high single digits), though, it's not quite a bargain yet.
Abbott Labs is certainly making an effort, and there are good growth opportunities within this business. Although I don't see the company capturing major market share from Boston Scientific (NYSE:BSX) or Johnson & Johnson (NYSE:JNJ) in the drug-coated stent space, it'll still get growth from this product (if approved) and many of the other drugs and devices in later-stage development. The question, though, is whether it'll get enough growth.
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Fool contributor Stephen Simpson owns shares of Johnson & Johnson.
