Despite A 70% Rally Abbott Stock Can Continue Higher
Abbott stock (NYSE: ABT) is up 23% since the start of the year and it has gained around 70% from its March lows. We believe that Abbott could offer an upside in the near term, as the company’s revenues in the last three quarters have actually grown by 1%, despite the impact of the pandemic on its sales. The growth in revenues was primarily led by Covid-19 testing. This is likely to bolster the earnings growth rate of the company in the near term – leading to stock price growth.
ABT stock has rallied from $63 to $107 off the recent bottom compared to the S&P which moved 63% over the same time period. A modest outperformance of Abbott can be attributed to its better than estimated earnings in Q2 and Q3. Looking at a wider time horizon, ABT stock is up 48% from levels seen in early 2019, over a year ago. Despite the recent rally, we feel that the company’s stock has more room for growth, as it has benefited from the Covid-19 testing, and its valuation implies it has further to go. Our dashboard ‘Buy Or Sell Abbott Stock provides the key numbers behind our thinking, and we explain more below.
Some of the stock price rise over the last year or so is justified by the roughly 4.5% growth seen in Abbott’s revenues from $30.6 billion in 2018 to $31.9 billion in 2019, and the figure is $32.2 billion for the last 4 quarters. This clubbed with Net Margin expansion of 49% from 7.7% to 11.6% meant that earnings grew 56%. On a per share basis, earnings were up 54% from $1.34 to $2.07, due to a 0.8% growth in total shares outstanding amid share issuances. The growth in margins in 2019 can largely be attributed to lower amortization expenses and taxes compared to the prior year.
Finally, Abbott’s P/E ratio based on trailing GAAP earnings contracted in 2019. It declined from 54x in 2018 to 42x in 2019. While the company’s P/E has now increased to 52x trailing earnings, it could see further expansion given that the earnings will likely see a strong growth in 2021 and beyond, after the pandemic, as we discuss in the section below.
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How Is Coronavirus Impacting ABT Stock?
The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, impacting the overall sales for Abbott. That said, Abbott is seeing strong gains in its Diagnostics business, aided by Covid-19 testing. Abbott’s first Covid-19 test was approved as early as March of this year, and since then the company has launched multiple new tests. Abbott now has a diverse range of solutions including a test called BinaxNOW that provides test results in fifteen minutes and works without relying on lab equipment. This has led to a 14% y-o-y growth in the Diagnostics segment revenues to $6.5 billion for the nine month period ending September 2020. The global spread of the coronavirus has also meant an increase in demand for nutrition and self-care products, including Abbott’s Freestyle Libre, which has gained market share and the Diabetes segment sales have surged 28% y-o-y to $2.3 billion in the first nine months of 2020.
While Diagnostics and Nutrition segments have offset the decline in other segments due to the deferment of elective surgeries, the trend may reverse going forward. Even if Abbott sees a decline in Covid-19 testing over the coming years after abundant supply for vaccines is available globally, it will see a strong pick up in demand for its medical devices business. Already, the elective surgeries are now being attended to by most of the healthcare institutions, implying the demand for Abbott’s medical devices products will likely remain high in the near term.
Looking at the broader economy, the actual recovery and its 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. At levels near $107, ABT stock is trading at 24x its 2021 estimated adjusted earnings of $4.40, compared to levels of 25x seen in 2018 and 26x as recently as late 2019, implying the stock still has some room for growth. In fact, we believe Abbott’s Valuation to be $130 per share, implying over 20% growth from the current levels.
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