Why Abbott Labs is attractive

The stock deserves a higher price than the market seems willing to give.

By Jim J. Jubak Apr 18, 2012 3:20PM
Nothing wrong with the first-quarter earnings numbers from Abbott Laboratories (ABT). In fact, I'd call them strong and above expectations.

In fact, the only disappointment has been the market's failure to put the higher price on the shares that I think they deserve. The company did report 13% earnings growth Wednesday morning, and still the stock trades at a price-to-earnings ratio of just 12.4 on trailing 12-month earnings, or 12.1 on projected 2012 earnings per share. 

Shares are up 9.23% in 2012. Not shabby, but the gain does trail the 11.27% for the Standard & Poor's 500 Index ($INX) . (Abbott Laboratories is a member of my Jubak's Picks portfolio. That's correct. But the stock is still listed as a member of my Dividend Income portfolio and that's incorrect. I sold it out of that portfolio on Feb. 3. I will fix this piece of bookkeeping later this week.)

My suspicion, as I've noted before, is that at least part of this lag is related to the breakup of Abbott Laboratories into two companies that's scheduled for completion by the end of 2012. That move is intended to release the market value of some of Abbott's real but overlooked strengths in nutritionals and diagnostics, for example. 

I think the split will indeed do that in, say, 2013, but in the meantime it seems to be damping gains in the stock. Could be that investors who would like to own the faster growing new drug company, post-split, or the medical devices/generics/nutritionals company would rather wait until they can buy exactly the piece that they want rather than having to sell off shares in the piece they don’t wish to keep. Wall Street analysts have put a sum-of-the-parts price of $60 to $65 on the post-split shares and that works as a kind of ceiling for Abbott's current share price.

Another part of the problem, though, is a more typical drug industry issue: increased competition for Humira, the arthritis drug that is Abbott’s bestseller, and for the company’s TriCor/Trilipix and Niaspan cholesterol drugs. The bigger of those two issues is competition for Humira, which contributed about 20% of the company’s revenue in 2011. Sales of Humira rose 17% year-to-year in the first quarter.

As of April 18, I’m not changing my target price. I think you can still look forward to a target price of $65 a share in the fall, say October, of 2012. Add in the stock’s current 3.4% yield and the total potential return may not be enough to make your heart race, but it’s very attractive to my mind in the current risky market environment.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Abbott Laboratories as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: ABT
1Comment
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
279
279 rated 2
454
454 rated 3
606
606 rated 4
675
675 rated 5
690
690 rated 6
622
622 rated 7
453
453 rated 8
301
301 rated 9
111
111 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
VZVERIZON COMMUNICATIONS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.