Continue To Ride Abbott Stock In The Current Pandemic
Abbott’s stock (NYSE: ABT) lost more than 27% – dropping from $87 at the beginning of the year to below $63 in late March – then spiked 66% to around $105 now. That means it is well above the levels where it started the year.
Why? Abbott secured regulatory approval for Covid-19 testing as early as March, and it has shipped over 100 million Covid tests across diagnostics platforms, including point-of-care, molecular lab tests, and antibody tests. Additionally, while the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Also, the company posted a better than expected Q3, led by solid growth in its Diagnostics business.
But is this all there is to the story?
Not quite. Despite the recent rally, Trefis estimates Abbott’s Valuation at about $132 per share, roughly 25% above the current market price based on two key opportunities.
The first opportunity we see is to Abbott’s Revenue growth over the coming years. The company’s Diagnostics business has seen a solid growth thus far in 2020, led by Covid-19 tests. The segment revenues were up 38% to $2.6 billion in Q3, with revenue from Molecular Diagnostics surging 4x to $458 million. Given the spread of Covid-19, there has been an increase in demand for self-care products as well, including Abbott’s Freestyle Libre, which has gained market share and the Diabetes segment sales have surged 28% y-o-y to $2.5 billion in the first nine months of 2020. The strong growth will likely continue for Freestyle Libre given its distinctive advantage of not requiring finger pricks to monitor one’s glucose levels, and the recent launch of Freestyle Libre 2.
Looking beyond Covid tests, with the opening up of economies, the healthcare institutions have begun attending to elective surgeries, which were deferred earlier. This means a gradual increase in hospital visits, number of procedures performed, and higher number of prescriptions issued, boding well for Abbott’s businesses, including Medical Devices, Diagnostics, as well as Established Pharmaceuticals. The deferment of elective surgeries has meant a backlog for hospitals to attend to. There has been a 35% decrease in operating room volumes in the US hospitals from March to July, a trend expected to continue for rest of the year.  Given the backlog, the demand for Abbott’s medical devices products will likely remain high in the near term.
The second key opportunity stems from Abbott’s valuation multiple compared to its peers. The stock now trades at 29x its projected 2020 adjusted earnings per share of about $3.56. In comparison, to earn close to $3 per year from a bank, you’d have to deposit about $300 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At Abbott’s current share price of roughly $105, we are talking about a P/E multiple of around 29x based on expected 2020 adjusted earnings of $3.56, and we think a figure closer to 37x will be appropriate.
While the 37x number appears high compared to levels seen over the recent years, it is due to the fact that 2020 EPS will be see slower growth, primarily due to the deferment of elective surgeries in the first half of the year. The estimated adjusted EPS of $3.56 in 2020 compares with $3.26 and $2.90 figures seen in 2019 and 2018, respectively. With the Medical Devices business expected to see strong growth from next year, and market share gains for Freestyle Libre, plus continued high demand for Covid-19 testing, clubbed with margin expansion due to better product mix and cost cutting measures, this will result in strong earnings growth over the coming years. In fact, we estimate the 2021 Adjusted EPS to be $4.15 per share, and at the current price of $105, ABT stock is trading at just 25x 2021 (expected) earnings.
Also, Abbott’s P/E multiple is lower compared to some of its peers, such as Boston Scientific which currently trades at 32x its average consensus 2020 earnings, while Intuitive Surgical trades at 71x, and Medtronic at 25x. Abbott, which has managed to post growth in 2020 despite the Covid-19 impact, primarily due to its Covid tests, is actually trading at the lowest multiple among the large medical devices companies, making it an attractive opportunity for over 25% gains in our view.
Looking at the broader economy, its recovery and timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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