ABBOTT LABORATORIES (NYSE: ABT)
Analysts: Jing Chen, Hisham Haider Dewan, Harout Sahakian
Company Overview
Abbott Laboratories, which was founded in 1888, is in the business of discovery, development, manufacture, and sale of a diversified line of health care products. The company has four reportable segments: Established Pharmaceutical Products (EPD), Diagnostics, Nutritionals, and Vascular Products. The firm also has two non-reportable segments: Diabetes Care and Medical Optics. In 2013, the three largest segments by revenue were Nutritionals (30%), EPD (23%), and Diagnostics (21%). In 2012, Abbot spun-off its pharmaceuticals division into an independent publicly traded company, AbbVie (NYSE:ABBV). Abbott's shareholders received one share of AbbVie stock for each Abbott share held. Abbott employs 91,000 individuals worldwide. In addition, the company has increased its dividend payout for 41 consecutive years.
Current Price / Current P/E / DIV Yield / 100 Day MA / Market Cap.$37.90 / 19.84 / 2.35% / 35.33 / $58B
Industry Overview
The health care industry has come under intense scrutiny in recent years, especially in the United States, due to a rise in costs and, as a result, regulation has been introduced that will impact various lines of business. The effects of the Affordable Health Care Act (ACA) are yet to be seen fully by the industry; the effects may be positive or negative. Total expenditures in the health care industry topped $5 trillion globally in 2012; the U.S. accounted for 40% of the expenses. The outlook for the industry remains strong with growth expected in various sectors. In particular, the following segments are expected to grow 5% or more through 2017: medical device manufacturing, glucose meter manufacturing, obesity medication manufacturing, and sports nutrition.
Financial Analysis, Projection and Valuation
The analysts assume revenue from all products to increase by 4% annually up to 2018. We expect EBIT margin to increase up to 2018. The cost of equity was determined by using 60% weight on CAPM implied return on equity and 40% weight on expected ROE for 2013 to reflect the business risk the company. DCF model gives an implied stock price of $36.97. We used 11 companies to calculate comparable company valuation using a number of prices and enterprise value multiples. The following table summarizes valuation results.
DCF / Comparable / Ben Graham$36.97 / $39.56 / $36.79
Risks
Increased regulation – Loss of patents – Delays in regulatory approval – Product liability claims
Recommendation
As current (Nov 11, 2013) stock price, $37.90,is below the implied price per share from comparable company analysis and above DCF price, we recommend holding the stock.
NOVEMBER 12, 2013Page 1