Abbott Laboratories stock analysis and valuation assessment

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.

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 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.

Conclusion

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.