The first component is as follows: Net Margin = Net Income/Sales. How much profit Abbott laboratories makes for very $1.00 it generates in revenue, and the higher a company's profit margin the better. The second component is as follows: Asset Turnover = Sales/Total Assets. The amount of sales generated for every dollar's worth of assets. This measures Abbott's efficiency at using assets, and again, the higher the number the better. The final factor of the Du Pont analysis is as follows: Leverage Factor = Total Assets/Shareholder's Equity. The higher the number, the more debt the company has. Abbott's Du Pont analysis is computed using the following equation:
In this case, for the end of 2006, Abbott Laboratories reported a net income of $717 million dollars, sales of $22,476 million, total assets for 2006 of $36, 178 million, and equity of $14,054 for 2006. Placing these figures into the equation above yields a 51% return on equity for Abbott Laboratories. For every dollar invested, Abbott generates 51 cents in assets. Thus, the Du Pont analysis of Abbott is very favorable.
Valuation & CAPM Analysis valuation of Abbott is it's market value, and can be determined utilizing the asset pricing model called CAPM, which is part of a larger body of economic theory known as capital market theory (CMT). CMT also includes security analysis and portfolio management theory, a normative theory that describes how investors should react in selecting common stocks for their portfolios, under a given set of assumptions. In contrast, the CAPM is a positive theory, meaning it describes the market relationships that will result if investors behave in the manner prescribed by portfolio theory. The capital asset pricing model is important because businesses and business interests are a part of the overall investment opportunities available in the total capital market. The determination of the prices of businesses is subject to the same economic forces as other investments. Abbott has maximized its business value by keeping an organized business and records for the valuation, including 5 years tax returns, P&Ls, Balance Sheets, List of Assets, and company history. As long as Abbott shapes and trims assets to match the cash flows, its business will remain in balance.
Summary of Analysis
Abbott displays several strengths as a company, including a valuable brand name, innovative products and marketing initiatives, and strong growth. Other strengths include a diversified product portfolio, clear distribution channels, and no significant concentration risks relating to customers, products or geographic locations. A review of the stock analysis indicates that Abbott's stock is a buy zone. The weaknesses displayed by the company's stock is that it competes in a heavily regulated industry where the development, manufacture, sale, and distribution of products are subject to comprehensive government regulation. In addition to many regulations, the company also runs the risk of rising costs and risks of new product development in addition to the costs associated with trying to comply with FDA mandated Quality Systems Regulations (QSR).
Nevertheless, the company faces many new opportunities such as the aging United States population and an increasing demand for pharmaceuticals. Other opportunities include strategic business and technology acquisitions and newly acquired businesses including Knoll Pharmaceuticals, Vysis, Inc., Biocompatibles International plc, BASF, Hokuriku Seiyaku Co., and Vysis, Inc., a leading genomic disease management company. Weaknesses that may have a negative impact on Abbott's stock include prescription drug reform that leads to accelerated patent expiration, because the majority of drugs are sold on prescription or recommendation of physicians. In addition, the company faces pricing pressures from generic manufacturers, peers, HMO companies, & government agencies. Abbott faces strong competition, as many other global pharmaceutical companies are investing resources into research and development, price and search cost for technological innovations. Finally, the expiration of patent protection can affect the future revenues and operating income of Abbott.
Abbott Laboratories is a broad-based health care company that discovers, develops, manufactures and markets products and services that span the continuum of care, from prevention and diagnosis to treatment and cure. Abbott's principal businesses are global pharmaceuticals, nutritionals, and medical products, including diagnostics and cardiovascular devices. The analysis of Abbott in the preceding sections indicates that the company continues to generate high revenues, maintain a favorable return on stock, and continues to make strategic business decisions. This is important because the return rate on stock remains to be a significant factor for global pharmaceutical companies, and in some cases may be a deciding factor between success and financial failure.
Abbott's business practices and goals have set the pace for the company's extraordinary portfolio management practices, security of the day-to-day management of resources, research, and development. Abbott has successfully overcome the uncertainty in drug development and competitive pressures. Abbott's business practices continue to make Abbott a unique company and has assisted the company to maintain its' global stance in the world of pharmaceutical companies.
Everything done at Abbott Laboratories is a reflection of the company's mission, a commitment to serving the total health-care continuum. Abbott's stock analysis concludes with the fact that competitive pressures call for an unprecedented in-depth analysis monitoring of the company stock's general risk exposure.
Abbott. (2007). About the Company. Retrieved November 9, 2007 at http://www.abbott.com.