Hua Haixing
Refky Saputra
Bradley Coyne
Presented October 28, 2014
 Investment Thesis
 Holding Information
 Macroeconomics & Industry Overview
 Company Overview & Business Segment
 Financial Performance
 Financial Projection & DCF
 Financial Conclusion
DCF
Investment Thesis Summary
Rating:
Overvalued
Price Target:
$26.22
Recommendation
Sale
24.20
Comps
33.77
25.46
Blended
16.00
28.67
25.46
21.00
26.00
28.67
31.00
 Weak medical devices performance in the past two years. We foresee medical
devices market to decline
 Weak US Pharmaceutical business; whether the potential sell-off will bring decent
reinvest return is undetermined
 Overvalued comparing with its peers: traded at 28x trailing P/E while its peers are
traded at 22x
 Overvalued based on DCF valuation, despite the aggressive sales growth
projection
36.00
Abbott is a 125 years old global healthcare company with unique mix of businesses and
broadly diversified portfolio of market-leading products is aligned with long-term
healthcare trends in both developed and developing markets.
As Per 10/27/2014:
Currently own 400 shares @ $26.72 (9.4% of Portfolio)
Cost of Position is $10,688
Current Share Price is $42.24
Value of Position is $16,896
Potential Gain $6,208 or 58%
New Environment in Health Industry
(2011 – 2020)
•
•
•
•
•
•
•
•
•
Economic Volatility
Focus on Key Mature Markets and Growth
Markets
7.6 % - 9.4% of global population aged 65
+
Obesity Epidemic
Social Media
Specialist-Medicine business model
(proteins with annual revebue of $1 Bn per
product
Treatment for rare/acute deseases
Products marketed to healthcare payers
Value based purchasing (using outcomes)
Sources: http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/market-opportunities-and-outlook.jhtml
13Q4
Diagnos
tics
21%
EPD
23%
14Q3
Sell-off of developed
market EPD business
Nutritio
nals
31%
Medical
Devices
25%
Source: Bloomberg ABT US Equity Financial Analysis
Diagnos
tics
24%
Nutritio
nals
35%
EPD
15%
Medical
Devices
26%
FY2013
Total Sales Growth
Key Emerging Market Growth
14Q1
14Q2
-2.87%
-6.7%
-0.2%
N/A
-9.23%
4.41%
14Q3
11.5% (claimed)
-37.6% (realized)
5.06%
 14Q3 -37.6% realized growth rate was due to sell-off of US EPD business to Mylan
Inc. for 21% of its stake (Market Value approximately $4 bn or $2.57 per ABT share)
 Company claimed that the 14Q3 Sales grow for 11.5% because they only kept the
most profitable emerging market business
 The past achieved emerging market growth was not as attractive
 The company kept changing their reporting methods to fool the investors
Sources: Data from Bloomberg ABT US Equity historical financial analysis
FY2011
FY2012
FY2013
14Q1-3
14Q3
Total Sales Growth
8.57%
7.74%
4.16%
2.20%
9.30%
Pediatric Growth
10.75%
10.36%
6.81%
0.04%
8.69%
Adult Growth
6.97%
5.04%
1.33%
4.99%
10.01%
 Products portfolio: 55%Pediatric, 45% Adult
 Solid sales growth over the past three years; weak in first 2Q 2014 due to supplier
issues;
 Infant formula: 40% of US market share (Top 2)
 Adult formula: Global market leader
Source: http://www.minyanville.com/trading-and-investing/stocks/articles/boomer-stocks-stocks-to-watch-stocks/6/18/2012/id/41797
Core Laboratory
Molecular
Point of Care
Main Products
Immunoassay, Clinical Infectious Disease,
Chemistry, Blood
HCV, and HIV testing
Screening, Hematology
Favorable Trends
Aging global population, increasing emphasis on disease prevention,
emerging market investments in healthcare, need for high-volume,
standardized systems, and long, durable contract cycles
Leadership Positions
#1 Globally in
Immunoassay and
Blood Screening
Sales Growth
2010 – 6.0%; 2011 – 8.8%; 2012 – 4.0%; 2013 – 5.9%
Growth Trends
Capturing growth in
Emerging Markets
Risk Factors
Competition, Rapid Product Obsolescence, and Regulatory Changes
Best-in-class Infectious
Disease Molecular
Tests
Largest and fastest
growing segment in
emerging markets
Abbott i-STAT
#1 Point of Care
Platform in the US
Expanding footprint
and developing next
generation system
Source: Abbott Diagnostic Strategy - http://prod2.dam.abbott.com/en-us/documents/pdfs/investors/our-strategy/Diagnostics_March_2014.pdf
Vascular
Diabetes Care
Glucose Monitoring
Meters & test strips
Vision Care
Main Products
Drug-eluting
Stents
Bioresorbabl
e Scaffolds
Cataract & refractive
laser surgery
devices
Risk Factors
Decreasing
price,
competition
FDA approval, Fierce competition,
expensivenes global market to
s
decline
Favorable Trends
Aging population; more diabetes, myopic & cataract patients; richer emerging
market
Market Outlook
European Market to decline,
Glucose-Monitoring
market peaked in
2011
Global Market to
grow
Sales Balance
55% Vascular
24% Diabetes
21% Vision
Sales Growth
FY2011: -2.3%; FY2012: -5.4%; FY2103: -0.6%; 2014 Q1-3: -0.3%
Acquisition of
OptiMedica
Sources: http://www.allaboutvision.com/conditions/cataract-surgery.htm; http://www.ibj.com/articles/41392-report-roche-mulls-sale-of-blood-glucose-monitorbusiness
; http://www.fiercebiotech.com/press-releases/european-coronary-stent-market-decline-490-million-2016-despite-growth-numb-0
Suppliers (medium)
• Suppliers are generally
price takers
• Component suppliers for
medical devices often has
better bargaining power
Threat of new entrant (Low)
• It is very expensive to entry
the Industry
• Oligopolistic Industry
• Prolonged drug and medical
device approval process
Rivalry among existing firms
(Medium)
• Generic companies has been
increasing focus in
establishing global operations
Substitute products (Medium)
• Generic drugs are
competitive
• Have top of the Line Products
• Strong pipeline to consumers
Buyer bargaining power
(Low)
• Healthcare demands are
inelastic
• Obama care made more
people covered in insurance
Strengths
S
Weaknesses
• Geographical diversity
• Diversified business operations
• Well Established Brands
• Lack of growth in certain segments
• Company is overly dependent
upon mature products whose
patents may expire in near future
Opportunities
Threats
•
•
•
•
•
•
•
•
Emerging market growth
High Birth Rates
Aging Population
New developments in technology
Regulatory Changes
Competitive landscape
Uncertain R&D outcomes
Product recalls
12
13
Source: http://marygardiner.wordpress.com/2013/05/28/product-cycles/
RATIO ANALYSIS
35.0%
6.00
30.0%
5.00
25.0%
4.00
20.0%
3.00
15.0%
2.00
10.0%
1.00
5.0%
0.0%
 Profitability dropped after Abbvie spin-off
 Leverage increased slightly comparing with
FY13
 Better working capital management
comparing with FY13
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Q1 2014 Q2 2014
Return on Common Equity (LHS)
Total Debt/Total Assets (LHS)
Inventory Turnover (RHS)
Ratio Analysis
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Q1 2014 Q2 2014
Profitability:
Return on Common Equity (LHS) 27.7%
28.5%
20.3%
20.1%
2.3%
9.9%
10.5%
10.4%
Leverage:
Total Debt/Total Assets (LHS)
27.0%
31.4%
31.2%
25.6%
30.5%
15.3%
18.6%
17.8%
Working Capital: Inventory Turnover (RHS)
4.28
4.37
4.54
4.80
2.77
3.10
3.67
3.62
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 2016-12-31 2017-12-31 2018-12-31
Revenue
Nutritionals
6,006.0
%Growth
Diagnostics
4,126.0
%Growth
6,471.0
6,740.0
6,888.5
7,508.5
8,071.6
8,555.9
9,069.2
7.74%
4.16%
2.20%
9.00%
7.50%
6.00%
6.00%
4,292.0
4,545.0
4,732.3
4,968.9
5,217.3
5,478.2
5,752.1
4.02%
5.89%
4.12%
5.00%
5.00%
5.00%
5.00%
EPD
--
5,121.0
4,974.0
3,942.1
3,465.2
3,811.7
4,192.9
4,612.2
%Growth
--
--
-2.87%
-20.75%
-12.10%
10.00%
10.00%
10.00%
5,808.0
5,495.0
5,460.0
5,476.7
5,495.7
5,516.9
5,540.5
5,566.6
-5.39%
-0.64%
0.31%
0.35%
0.39%
0.43%
0.47%
3,071.0
3,012.0
2,981.9
2,952.1
2,922.5
2,893.3
2,864.4
-7.86%
-1.92%
-1.00%
-1.00%
-1.00%
-1.00%
-1.00%
1,327.0
1,306.0
1,306.0
1,306.0
1,306.0
1,306.0
1,306.0
-2.71%
-1.58%
0.00%
0.00%
0.00%
0.00%
0.00%
1,097.0
1,142.0
1,188.8
1,237.6
1,288.4
1,341.2
1,396.3
-1.26%
4.10%
4.10%
4.10%
4.10%
4.10%
4.10%
476.0
115.0
129.0
158.8
158.8
158.8
158.8
158.8
21,407.0
21,494.0
21,848.0
21,198.4
21,597.0
22,776.3
23,926.3
25,158.9
0.41%
1.65%
-2.97%
1.88%
5.46%
5.05%
5.15%
Medical Devices
%Growth
Vascular
3,333.0
%Growth
Diabetes Care & Other
1,364.0
%Growth
Medical Optics
1,111.0
%Growth
Other
Total Revenue
%Growth
Beta Calculation
Date Range:
Data :
Calculation Method:
Regression Results:
Cost of Debt
1/1/2013 to
Last Price Weekly
Linear Regression
Raw Beta
Adjusted Beta
Std Error
Confidence Interval
11/7/2014
1.16
1.11
0.15
Upper Lower
0.96
1.25
Long-term Borrowings
5.125% Notes, due 2019
4.125% Notes, due 2020
6.15% Notes, due 2037
6.0% Notes, due 2039
5.3% Notes, due 2040
Total Amount
947
597
547
515
694
Weighted Average Long-term Borrowing
Weighted Average Short-term Borrowing
Interest Rate
5.13%
4.13%
6.15%
6.00%
5.30%
5.29%
0.40%
Weighted Average Cost of Debt
Weight
28.7%
18.1%
16.6%
15.6%
21.0%
46.4%
53.6%
2.67%
Cost of Equity
Value
Beta
1.11
Risk Free Rate
2.38%
Market Risk Premium
7.22%
CAPM Cost of Equity
Annualized return Since 2013
Total Weighted Cost of Equity
Source
Yahoo Finance Beta
Ten-year US Treasury
Bloomberg Country Risk
10.37%
19.67%
12.23%
Weighted Average Cost of Capital
Value
Total Amount of Financial Debt
Market Value of Equity
Tax Rate
WACC
Percentage
in Mn USD
16,535
65,788
(%)
20.1%
79.9%
30.1%
10.15%
FCF Calculation
Count
USD (million)
EBIT
- Tax
+ Depreciation & amortization
- CAPEX
- Increase in NWC
FCF
WACC
Risk Premium
Discount Factor
1.25
2015E
2.25
2016E
3.25
2017E
4.25
2018E
2545.6
-134.5
1672.5
-1105.3
0.5
2593.6
-137.2
1728.8
-1126.1
-106.3
2732.3
-144.7
1823.2
-1187.6
-314.5
2870.6
-152.0
1915.2
-1247.6
-306.6
3018.4
-159.9
2013.9
-1311.8
-328.7
2978.8
2952.8
2908.7
3079.6
3232.0
2901.1
2587.3
2293.0
2184.2
2062.3
10.15%
1.00%
11.15%
Present Value of FCF
Terminal Value Calculation
Terminal Growth Rate
Terminal Value
Present Value of Terminal Value
0.25
2014E
3.5%
43725.9
27901.14
Value per Share Calculation
Enterprise Value
+Proceeds from selling the business
-Net Debt
Equity Value
Total Number of Shares Outstanding
Implied Share Price
39929.0
4002.6
3086.0
40845.6
1,558.0
26.22
Discount Rate
Sensitivity Analysis
26.22
10.15%
10.65%
11.15%
11.65%
12.15%
3.00%
28.27
26.55
25.04
23.70
22.51
Terminal Growth Rate
3.25%
3.50%
3.75%
29.04
29.86
30.75
27.21
27.91
28.67
25.61
26.22
26.87
24.20
24.73
25.29
22.95
23.41
23.91
4.00%
31.72
29.48
27.56
25.89
24.43
Sales Projection
 We cannot foresee the company to have any big change, so our sales growth
projection is predominantly based on the past figures.
 Nutritionals: despite that the company only achieved an average growth rate of
 Although the company improve their Operating margin from 7.6% in 2011 to 12%
in 2013, their first 3Q achieved operating margin maintained at 12%, so I cannot
foresee a larger operating margin going forward.
Beta Calculation
 We run regression for weekly close price since 2013-Jan-01 for several reasons: 1)
By using weekly price we transpire the volatility of day-trading. 2) The ABBV spinoff took place at Jan 1st, 2013, so using the data since 2013 can better reflect the
current nature of business.
DCF-Share Price Calculation
 The company will sell off its US Pharmaceutical business to Mylan Inc. for 21% of its
stake. The sell-off will cause the FCF to decrease, while owning only 21% of stake
will not have any influence on ABT’s income statement, so we directly added the
Mylan’s value into the DCF resulted share price.
Major Comparables
Company Names
EV/Revenues
EV/EBITDA
P/EPS(ttm) P/Forward EPS
JOHNSON & JOHNSON
3.81
12.36
18.02
18.17
ROCHE HOLDING AG-GENUSSCHEIN
5.43
12.71
20.88
19.78
BOSTON SCIENTIFIC CORP
2.91
26.66
30.82
16.03
MEDTRONIC INC
3.68
11.25
17.50
16.86
NOVARTIS AG-REG
4.41
16.19
21.07
17.61
Selection criteria
 Comprehensive health care companies: after the spin-off of ABBvie, ABT is no longer a
pharmaceutical company, so we try to avoid 100% pharmaceuticals.
 Global Presence: since ABT is gradually moving its focus to emerging market, we try to
choose companies with global presence as comps.
EV/Revenues
EV/EBITDA
P/E(ttm)
Forward P/E
Median
3.81
12.71
20.88
17.61
Mean
4.05
15.83
21.66
17.69
25.46
33.77
31.94
33.13
26.25
26.37
ABT Net Debt (ttm)
13,029.38
Total Share Outstanding
Implied Share Price
1,558.00
(Based on Median Multiples)
(Based on Average Multiples)
43.54
46.74
Key Takeaways:
 ABT share price:
$42.24 as of Oct. 27th,2014
 Trade at fair value based on EV/Revenue, overvalued based the other ratios even taking into
account the value of Mylan Inc. ($2.57 per share)
 ABT has lower margin comparing with its peers
Current stock price $42.24 as of Oct 27 , 2014
DCF $26.22
Comparables $32.09
We recommend to sell 100 shares
at the market price