Abbott Laboratories (NYSE: ABT) Executive Summary and Investment Recommendation
Investment Managers: Shih-Yi Chang, Richie Hartz, and Anastasia Sutjahjo
Company Overview
Abbott Labs (NYSE: ABT) was founded in Chicago in 1900, and went public in 1929. The
company operates in five key divisions – proprietary pharmaceuticals, nutritional products,
established pharmaceuticals, diagnostic products, and vascular products. However, in January
2013, Abbott will spin off its proprietary pharmaceutical division, which accounts for about 44%
of 2011 revenue, into an independent, publicly traded company. This new company, Abbvie, will
also trade on the NYSE with ticker symbol ABBV.
Abbott will remain a public company operating through the remaining four business segments
mentioned above. Each of Abbott’s investors will receive one share of ABBV for each share of
ABT that they own as of December 12, 2012. One of Abbvie’s growth drivers is the arthritis
drug Humira, for which Abbott received rights through their acquisition of Knoll
Pharmaceuticals. This single drug accounted for 21% of Abbott’s sales in 2011.
Macroeconomic and Industry Overview
The growing and aging population domestically is expected to increase demand for the
pharmaceutical industry moving forward. Further, as the economy recovers, the unemployment
rate is expected to decline – enabling more individuals to be covered by employee health
insurance. The legal progression of “Obama-Care” will also likely enhance pharmaceutical
performance in future years.
Emerging markets internationally represent a key opportunity for the pharmaceutical industry,
and Abbott has become increasingly reliant on this market in recent years. Rising costs of
research and development, the highly regulated clinical trial process, and intense competition
from generic pharmaceuticals have established a significant barrier for new entrants.
Financial Analysis, Projection, and Valuation
Abbott has increasingly stable gross profit margins and EBIT margins. We expect an artificial
pullback in the equity value during the immediate timeline of the spin-off, though this pullback
represents analysis outside of the fundamentals driving valuation and therefore presents a buying
opportunity. DCF valuation presents an implied stock price of around $72, using a discount rate
of just under 10%. Looking to Johnson & Johnson, Pfizer, and Merck as competitors, multiples
analysis presents an implied stock price of around $65. The spin-off is expected to unlock and
enhance the value of both equities.
Recommendation
On November 27, 2012, the RCMP investment management team recommends to purchase 100
additional shares of Abbott at the current market price.