Abbot Labs (ABT) - I Am Still In Love
Abbott Labs (ABT) is getting a less than happy round of applause today from the market as the company reported earnings that beat by a penny on the headline number but missed the consensus numbers by a penny under GAAP accounting. The top line growth, however, was more than impressive as sales grew 15.2% in constant currency; bottom line growth mostly followed the sales growth. Cost of goods sold has soared in the quarter due to a very fast growth of lower margin drugs Mobic and Flomax.
Is this a problem? Well I would love to see sales grow and margins expand at the same time, but I wish all my companies had ABT's problem. Margin shrinkage that is due to an unfavorable (to margins) product mix doesn't really worry me. I would be more concerned if the margin compression was driven by competitive forces or price decreases.
After backing out acquired R&D from the last year's numbers to equalize the comparisons, operating earnings still grew 14% - a very respectable number. There was plenty of one time noise below the operating earnings number from higher taxes due to foreign cash repatriation etc; I am not going to waste my breath on it. I'll let the sell side analysts worry about that, as analyzing that noise and asking 'smart' questions on the conference calls seems to be enough justification for their existence.
What I really liked about the company's performance in the quarter is that growth was broad based (very typical for ABT) in most of its segments - screaming quality. As I mentioned before, ABT's product line is extremely diversified. It doesn't have a typical blockbuster exposure that has been hurting many large pharmaceutical companies. Putting all the noise aside (i.e. ABT's third quarter guidance came in 2 cents lower than street estimates though the company kept full year estimates in tact), long term prospects for the stock are outstanding.
Valuation of ABT is still very attractive, and actually just became more attractive after today's sell off (not advice). It trades at 17 times 2006 earnings. There is a hidden call option embedded in the stock, as the market doesn't put any value on a drug coated stent that is still in development. So far ABT is only incurring R&D costs related with stent development but no revenues, thus further depressing its margins. In my view weakness in the stock is most likely a buying opportunity (not advice - I mean it), especially when the weakness is driven by Wall Street shortsightedness.
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