Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Abbott Laboratories fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Abbott Laboratories (Abbott) is engaged in the discovery, development, manufacture, and sale of a portfolio of science-based health care products. Abbott operates in four business segments: diagnostics, medical devices, nutritionals and generic pharmaceuticals. Geographically, 30% of its revenue is generated in the United States; 30% in Western Europe, Canada, Japan and Australia, and 40% in the economies, including India, China, Russia and Brazil. In January 2013, the Company completed the separation of its research-based pharmaceuticals business, which became AbbVie, a new independent biopharmaceutical company. In August 2013, Abbott Laboratories completed its acquisition of OptiMedica Corporation. In August 2013, Abbott Laboratories completed its acquisition of IDEV Technologies.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$39.80|
|Value Based on 0% Growth||$23.33|
|Market Implied Growth Rate||2.98%|
|Net Current Asset Value (NCAV)||$0.95|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Abbott Labs is a very strong company at the initial stages of the ModernGraham analysis, having passed all of the requirements of the Defensive Investor. The company also passes the requirements of the Enterprising Investor, except for the requirement regarding earnings growth. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding further with additional research including a review of ModernGraham’s valuation of Johnson and Johnson (JNJ) and 5 Outstanding Dow Components. Moving on to the valuation stage, the company does not fare well after exhibiting a lack of earnings growth over the last five years. EPSmg (normalized earnings) have gone from $2.79 in 2009 to $2.74 for 2014, and this lack of growth clearly does not support the market’s implied estimate of 2.98% earnings growth going forward. Accordingly, the ModernGraham valuation model has returned an estimate of intrinsic value that falls below a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Abbott Laboratories (ABT)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Abbott Laboratories (ABT) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.