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.

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Apr 20, 2012 1:44AM

Great article.

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