ModernGraham Valuation: Abbott Laboratories (ABT)

moneyCompany 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 and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. 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 = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $26
MG Opinion Overvalued
Value Based on 3% Growth $41
Value Based on 0% Growth $24
Market Implied Growth Rate 2.27%
Net Current Asset Value (NCAV) -$0.44
PEmg 13.03
Current Ratio 1.74
PB Ratio 2.42

Balance Sheet – 9/30/2013 

Current Assets $19,748,900,000
Current Liabilities $11,331,700,000
Total Debt $3,403,100,000
Total Assets $44,132,500,000
Intangible Assets $15,651,000,000
Total Liabilities $20,436,200,000
Outstanding Shares 1,546,190,000

Earnings Per Share

2013 (estimate) $1.81
2012 $3.75
2011 $3.02
2010 $2.96
2009 $3.69
2008 $3.03
2007 $2.31
2006 $1.12
2005 $2.16
2004 $2.02
2003 $1.75
2002 $1.62

Earnings Per Share – Modern Graham 

2013 (estimate) $2.85
2012 $3.34
2011 $3.09
2010 $2.96
2009 $2.79
2008 $2.27

Conclusion:

Abbott Laboratories has strong financials, having passed every test of the Defensive Investor and Enterprising, except for the Defensive Investor’s requirement of a current ratio greater than 2.  This is a company that has displayed stable earnings growth, a strong dividend history, and is currently trading at fairly low PEmg and PB ratios.  Compare this to some similar companies such as Merck (MRK), Pfizer (PFE), and Johnson and Johnson (JNJ) and you will find Abbott Laboratories to be the strongest of the bunch.  However, from a valuation perspective the company appears to be overvalued at the current time.  While the EPSmg (normalized earnings) have grown from $2.27 in 2008 to an estimated $2.85 for 2013, that level of historical growth does not support the market’s implied rate of 2.27%.  However, if the company can achieve a growth rate of around 3%, the current price would be fair.  As a result, Defensive Investors and Enterprising Investors should keep a close eye on Abbott Laboratories to find a more opportunistic time to purchase.

What do you think?  Do you agree that Abbott Laboratories is overvalued?  Is the company suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Abbott Laboratories at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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Comments

2 responses to “ModernGraham Valuation: Abbott Laboratories (ABT)”

  1. Bridget Avatar

    I purchased ABT before the split into ABBV and I’ve been really happy with it. One of the first stocks I bought! It does seem to be overvalued right now which is why I’m glad I got in when I did =)

    1. Benjamin Clark Avatar

      Thanks for the comment. I’m glad you’ve done will with the investment!

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