Abbott Labs (ABT)

December 19, 2019

COMPANY DESCRIPTION

Abbott Labs (ABT) develops, manufactures and markets a variety of medical products and
services. Its products include nutritionals for adults and infants, diagnostic systems, vascular
implants, and diabetes care products.

INVESTMENT THESIS

 In 2018, ABT reported four quarters of high-single-digit revenue growth and favorable
operating leverage. It also integrated two acquisitions and paid off $8 billion in debt. More
recently, third-quarter results were for the most part strong, as organic growth accelerated to7.6%
and EPS  rose 12%, Abbott Laboratories now projects revenue growth of 7.0%-8.0%, up from
6.5%-7.5% and a double-digit increase in EPS. On the basis of strong second and third quarter
results and the company’s raised guidance, we maintain our BUY rating.

RECENT DEVELOPMENTS

On October 16, Abbott Labs reported third-quarter results that met our estimates and were in line
with our full-year forecast. Third-quarter revenue was strong, rising 7.6%, both organically and
in constant currency, driven by recovery in established pharmaceuticals and the successful
introduction of medical devices. Helped by carefully managed costs and lower interest payments
attributable to debt reduction, earnings grew year over year to $0.84 from $0.75 per share, a 12%
increase and in line with the consensus estimate.

EARNINGS & GROWTH ANALYSIS

Abbott’s position as a market leader and opportunities to improve margins in its Diagnostics and
Nutritionals divisions should enable it to achieve mid-single-digit revenue growth and double
digit adjusted earnings growth over the next two years.

In the second quarter, Abbott raised guidance for 2019. It now projects organic revenue growth
of 7.0%-8.0%, up from 6.5%-7.5% previously, which excludes the impact of foreign exchange.
ABT also now expects adjusted EPS of $3.21-$3.27, up from $3.15-$3.25, above the consensus
estimate of $3.24.

Based on the updated guidance and stronger than anticipated 2Q19 earnings, we are raising our
2019 adjusted EPS estimate to $3.34 from $3.30. For 2020, we are keeping our estimate at $3.80.
Our long-term growth estimate is 12%.
RISKS

Reimbursement policies established by health organizations could affect the company’s revenue.

ABT sells medical devices and diagnostic tools that must be approved by regulators in the U.S.,
the EU, and Japan. In the coronary stent market, Abbott faces stiff competition from Medtronic
and Boston Scientific.

VALUATION

ABT trades at 22.9-times our 2020 EPS estimate, compared to an average multiple of 19 for
other medical device stocks. The company is well positioned within emerging markets, and in
our opinion, the shares warrant a premium valuation. Multiplying our FY20 earnings estimate by
27.6 generates a valuation of $105. Our target, if achieved, offers investors the prospect of a 22%
return, including its dividend.

Abbott Labs (ABT)

Current Price: $86.91

Target Price: $105

Current Valuation: 22.9 times FY20 EPS

Target Valuation: 27.6 times FY20 EPS