Abbott Earnings Preview: Steady Growth Expected Despite Short Term Weakness In Nutritionals

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Abbott Labs ( ABT ) is scheduled to release its Q4 2013 earnings on Wednesday, January 22. In the previous quarter, the company reported a 4.3% year-over-year increase in operational sales as Diagnostics, Abbott's second largest business division, saw an impressive 10.5% revenue increase. Nutritionals, the largest division, recorded moderate sales growth of 3.4% as the company was impacted by a disruption in some key emerging markets, including China. The company did well on the cost side, as gross margins increased by 1.6% over the past year with continued improvements in the Nutritionals and Diagnostics businesses. Adjusted operating margins also improved by 210 basis points due to a sharp decline in SG&A expenses (9.7% y-o-y).

We expect more of the same in the upcoming earnings release as the company continues to focus on expanding its markets and improving operational efficiencies. Our $40 price estimate for Abbott Labs is in line with the current market price.

See our full analysis for Abbott Labs

Nutritionals and Diagnostics To Drive Growth Again

Together, the Nutritionals and Diagnostics divisions account for over 50% of Abbott's revenue. Both of these divisions have been reporting solid growth in sales due to strong demand from emerging markets. Countries such as China, India, Russia and Brazil continue to grow at a faster rate than most developed economies, and have rapidly growing middle classes. McKinsey & Company predicts that the urban household income in China will double by 2022 and that the majority of its urban consumers will earn between $9,000 and $34,000 annually by that time. As the middle class continues to grow in these markets, people are likely to increase increase their discretionary spending on nutritional products (such as food supplements) and point-of-care diagnostics.

Chinese Sales Likely To Bounce Back Within Next Few Quarters

Abbott's nutritional business ran into some trouble with Chinese regulators in the second quarter. First, it was fined around 77 million Yuan ($12.63 million) for allegedly collaborating with several competitors to fix the prices of its baby formula products in the country. Second, it was asked by China's national quality watchdog to recall two batches of its infant baby formula products due to concerns that they might contain bacteria that cause food poisoning.

Both of these events impacted Abbott's sales in China as growth in the Nutritionals business halved to 3.4% in the third quarter. We expect the impact of these recalls to fade considerably in the next few quarters as Abbott's marketing initiatives bear fruit. Thereafter, the company should start gaining market share again at a healthy rate as it launches new products and expands its geographical presence (also see Why Abbott's Troubles With Chinese Regulators Are Not A Big Deal ).

New Acquisitions Could Boost Sales

In August 2013, Abbott made two important acquisitions to boost its offerings in the Vascular and Medical Optics segments. It acquired IDEV Technologies,a stent manufacturing company, for $310 million net of cash and debt to boost its sales in the Vascular segment. IDEV's flagship stent, SUPERA Veritas, already sells in Europe for treating blockages in blood vessels due to peripheral artery disease (PAD), a sickness that ails 27 million people in Europe and North America. It is also under FDA review for superficial femoral artery (SFA) treatment in the U.S.

In the Medical Optics business, Abbott acquired OptiMedica Corporation for about $250 million net of cash. OptiMedica's flagship product, Catalys, allows surgeons to replace manual steps in cataract surgery with computer-guided laser technology, and provides Abbott an entry point in the large and fast growing laser cataract surgery market.

We believe these acquisitions could help Abbott Labs register some growth in these businesses, albeit not all organically.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ABT , BSX , MDT

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