Valuentum Exclusive Analysis for the Discerning Investor

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Global pharmaceutical company Abbott (click ticker for report: ABT) reported strong results Wednesday morning. The firm earned $1.23 per share, beating the consensus estimate by a penny and up about 10% compared to the same period last year. Revenue grew 2% year-over-year, to $9.8 billion, about in-line with expectations; however, revenues grew 6.7% on a constant currency basis. Abbott’s gross margin increased 310 basis points to 63.3% driven by a favorable product mix and improved operational efficiencies. In spite of currency fluctuations, the firm retained its earnings guidance of $5.00-$5.10 per share and remains on track to separate Abbott and AbbVie by the end of the year. Though we like the firm, we think shares are fairly valued at current levels.

Performance was strong across most segments, but reported results were, not surprisingly, heavily impacted by currency headwinds. Abbott’s proprietary pharmaceuticals business grew revenue 8% year-over-year, mostly driven by strong sales of blockbuster drug Humira, which grew 16.5% in the second quarter (23% ex-currency fluctuations). Testosterone booster AndroGel also boosted sales, growing 25%. The proprietary pharmaceuticals segment will become AbbVie later this year, and we think powerful sales from Humira (under patent protection until 2016) and AndroGel (protected until 2021) will provide the firm with plenty of cash to invest in its pipeline when it becomes a standalone business.

Though AbbVie will own the segment responsible for the firm’s blockbuster drugs, the new Abbott will have some strong businesses of its own. The nutritionals segment grew revenues 13% in the US and 1% internationally. The nutritionals segment is home to some well-known brand names like EAS, Myoplex and ZonePerfect—all of which may benefit from overweight Americans attempting to improve their health. The sports nutrition sector, in particular, is somewhat nebulous and filled with various companies with questionable backgrounds. Thus, we think a company such as Abbott should be able to gain share based on its reputation alone. All of Abbott’s diagnostics businesses are also growing strongly in the United States. Core laboratory diagnostics, molecular diagnostics and point of care diagnostics grew 15.3%, 7.3% and 16.9%, respectively in the US. However, the more mature (and larger) international diagnostics businesses remain challenged by economic headwinds and negative currency impacts.

Overall, we thought Abbott’s results were strong in light of currency headwinds and large international exposure. Shares still yield slightly in excess of 3% at current levels, and we believe both AbbVie and Abbott will continue to be strong companies following the firm’s split. However, we do think shares are fairly valued at current levels, and we would wait for a more attractive entry point before adding it to the portfolio in our Best Ideas Newsletter.