Abbott Labs Stock Analysis Abbott

Abbott Labs Stock Analysis ABBOTT LABORATORIES STOCK ANALYSIS In the past few years, the stock performance of companies has demonstrated the potential success or failure of numerous companies competing in the same industry. The pharmaceutical industry is a highly saturated industry in which many global companies compete in. Abbott Laboratories is a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines as well as many of the world's best known consumer healthcare products.

Abbot's products span the continuum of care, from nutritional products and laboratory diagnostics through medical devices and pharmaceutical therapies. Abbott is over 100 years old, and has 65,000 employees worldwide with sales, manufacturing, research and development, and distribution facilities around the world. The company has received numerous local, national and international distinctions for commitment to workplace excellence, with programs ranging from award-winning health care benefits to a variety of convenience and wellness services and long-term retirement benefits.

This paper will provide an overview of Abbott Laboratories, it's position in the industry, and the extent of it's global operations. It will also analyze the company's stock, with a risk and return and valuation analysis. Background of Abbott Laboratories & Operations Abbott Laboratories manages a wide line of products and business lines.

Abbott's pharmaceutical products include treatments for people with HIV; therapies for sufferers of rheumatoid arthritis; drugs for the treatment of people with migraines, epilepsy and mania associated with bipolar disorder; antibiotics; and specialized medicines for managing obesity, thyroid disease, high cholesterol and hypertension (Abbott Laboratories, 2007). In addition, Abbott is behind some of the world's most trusted names in infant, adult and healthy living nutritional products, including Similac, Ensure, Glucerna, AdvantEdge, Body-for-LIFE and ZonePerfect.

In addition to these well-known consumer brands, Abbott also offers medical nutritional products and feeding devices for patients with special dietary needs due to injury or illnesses such as cancer, respiratory conditions and food allergies (Abbott Laboratories, 2007). The company's broad range of medical diagnostic instruments and tests are used worldwide in hospitals, reference labs, blood banks, physician offices, clinics and at home to diagnose a range of serious health issues such as infectious diseases, cancer, diabetes and genetic conditions, as well as monitor other important indicators of health.

Abbott's molecular diagnostics assist physicians detect genetic mutations in patients' genes and chromosomes to detect and manage disease. Abbott Laboratories also manufactures hand-held point of care diagnostics and blood glucose monitoring devices. The company's products include medical and surgical devices that improve the care of people with vascular disease and spinal conditions.

Vascular offerings include vessel closure devices, carotid and coronary stents, catheters and other interventional tools and devices, and a growing line of specialized technologies for treating people with spinal diseases and injuries includes minimally invasive spinal fixation products (Abbot Laboratories, 2007). Finally, Abbott also offers veterinary products such as anesthetic and wound care products, nutritional supplements, and intravenous sets and solutions. Abbott holds a competitive and prominent position in the pharmaceutical industry, and key competitors within the pharmaceutical market include Bayer AG, Merck, Pfzier, Eli Lilly and Novartis.

Competition among competitors is intense with companies racing to launch new products before other companies release similar products. Abbott's extent of international operations is widespread, as the company markets its products in over 130 countries. Abbott's revenues for 2006 were at $22.5 billion, and continue to increase for 2007. Abbott has recently made other strategic decisions that will increase the revenue and company performance for the end of 2007.

For example, in January of 2007, Abbott announced the sale of its core laboratory and point-of-care diagnostics business, including Abbott Point-of-Care, to GE for $8.1 billion in cash, resulting in approximately $6 billion in after-tax proceeds (Espicom, 2007). Abbott's in vitro diagnostics business, including point-of-care, generated sales of approximately $2.7 billion in 2006. According to pharmaceutical industry reports, Abbott's most significant event has been its acquisition of the Guidant businesses, which generated combined sales of over $1 billion in 2005 and had nearly 6,000 employees in three main locations: Santa Clara, California, USA; Temecula, California, USA; and Clonmel, Ireland.

Competition Affecting Abbott's Stock Value Abbott Laboratories competes in a large industry that contains many similar giant competitors. Bayer AG, a German company, is another global pharmaceutical leader, whose primary objective is to sustainably increase enterprise value. This company has faced more challenges than Abbott has in the past few years. Bayer's 2003 sales in the healthcare group declined by 5.3% to $8,871 million. Employment at Bayer decreased from 115,400 in 2003 by 7,200. 2003 proved to be an extremely challenging year for Bayer, with events surrounding Baycol in the United States causing considerable anxiety among stockholders.

Baycol was withdrawn from the market in light of litigation involving serious side effects of the drug. Without acknowledging any liability, Bayer settled 2,224 Baycol cases in the United States, resulting in settlement payments totaling $842 million. Shareholder anxiety regarding Baycol was dispersed through individual meetings with both institutional and private investors and roadshows. Merck & Company is also a global pharmaceutical and chemical company, and a soon to be former market leader in the laboratory distribution business. Merck's 2003 sales were $7,202 million, with sales in the pharmaceutical sector increasing by 4.8%.

Merck's laboratory distribution accounted for 33% of their total sales. In 2003 Merck employed 34,206 individuals, with a -0.9-reduction rate from the previous year. Merck's research and development expenditure increased slightly to $605 million, one of the companies whose research and development budget come close to that of Abbott's. Merck's has decided to dispose of the laboratory distribution company in order to help eliminate financial debt, resulting in predictions of reduced sales.

In 2004 Merck pulled its popular arthritis drug Vioxx off the market due to the increased risk of heart attack and stroke in patients. This move predicted revenue cuts by 11%. In the wake of the Vioxx news, Merck's shares fell from $45 to $31.67. Eli Lilly is another pharmaceutical giant similar to Abbott. Eli Lilly employs 46,000 employees worldwide with approximately 8,800 employees engaged in research and development. Clinical research is conducted in more than 60 countries with research and development facilities located in 9 countries.

In 2003 Eli Lilly's sales were $12,582.5 million, with a mission to maintain recognition as a leading, innovation driven company committed to developing a growing portfolio of best-in-class and first-class pharmaceutical products that help people live longer, healthier and more active lives. Finally, Novartis AG is another global leader that develops and manufactures pharmaceuticals and nutritional products. Novartis' core businesses are pharmaceuticals, consumer health, generics, eye-care, and animal health. In 2003, sales were $24.9 billion with a net income of $5 billion.

Approximately $3.8 billion was invested in research and development, Novartis has 78-500 employees which operate in over 140 countries around the world. Novartis' mission is to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance the quality of life. Novartis seeks to provide a shareholder return that reflects outstanding performance and to adequately reward those who invest ideas and work in the company.

Risk & Return Analysis on Abbott Laboratories Stock An analysis of the risk and return on Abbott Laboratories stock over the past three years indicates that the company demonstrates strong growth, and innovative marketing potential with a promising pipeline of drugs, new acquisitions and strategic alliances. A review of the chart below indicates that different valuation models confirm Abbott's strong growth potential, rating the stock in a buy zone.

An overview of the company's revenues for the last three years as related to stock risk and return is as follows: Summary of Financial Data Dollars in millions, except per share data) Net Sales $ 19,680.0 Cost of products sold $ 8,884.2 Research and development to net sales % 8.6 Net cash from operating activities of continuing operations $ 4,306.0 Capital expenditures $ 1,291.6 Cash dividends declared per common share $ 1.04 Common shares outstanding (in thousands) 1,560,024 Number of common shareholders 88,582 Number of employees According to above chart, Abbott's stock is good, as it has steady, stable and sustainable pattern of measures over the three-year period.

The manner in which the current stock price compares with the fair value also indicates that Abbott stock is at a good value. A review of the research indicates that all four valuation models (no growth, multistage growth model - high growth at 15% after five years 5% growth, and P/E model) confirm that Abbott has strong growth potential. The models indicate different opportunities of growth and a different value of the stock.

According to those models, the value of the stock is much higher than the current price, which confirms that the stock has strong growth potential. Du Pont Analysis of Abbott Laboratories Abbott Laboratories can be analyzed utilizing the factors of the DuPont analysis. In the analysis below, only the financials for 2006 are computed. The other years are included for comparison purposes only.

The financial figures used to compute the analysis are as follows: Income Statement Quarterly Sep '07) Annual 2006) Annual 2005) Total Revenue Gross Profit Operating Income Net Income Balance Sheet Total Current Assets Total Assets Total Current Liabilities Total Liabilities Total Equity The Du Pont Analysis is a means of analyzing the three components of return on equity. 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.