After spinning off AbbVie and its portfolio of high-margin proprietary pharmaceutical products, the new Abbott is left with a handful of lower-margin businesses that seem to have little synergy among them. While we are not particularly excited about the prospects for growth in Abbott's segments, we think there is plenty of room for Abbott to enhance efficiency and fuel earnings growth.
Even though Abbott competes in markets that offer appealing margins, it presently trails key competitors in various segments on profitability, including Boston Scientific, C.R. Bard, Mead Johnson, Dr. Reddy, and Roche's diagnostic division. Addressing this situation is low-hanging fruit that is largely under management's control. If Abbott can exceed our expectations and close the profitability gap with its competitive set, there is upside to our valuation.
|Economic Moat||Fair value||Stewardship Rating|
Healthcare - Medical Devices
KEY INVESTMENT CONSIDERATIONS
- Nutritionals are the moatiest part of Abbott. The firm enjoys an extensive portfolio of high-quality pediatric and adult brands, as well as an established global infrastructure for manufacturing, marketing, and distribution.
- Abbott has committed to raising margins in the nutritionals segment by 500 basis points over the next three years. We think there is potential for even greater gains.
- Abbott has easily rolled out one next-generation device after another, giving us confidence that it can defend its position in those markets. But, attempts at revolutionary innovation have left us unenthusiastic.
- Abbott's Xience stent remains a powerhouse in the drug-eluting stent market, thanks to its well-established record of safety and efficacy.
- Aggressive cost-cutting plans should propel Abbott's bottom-line growth much quicker than top-line growth.
- Abbott's investments in building out its emerging-markets infrastructure should give the firm a head-start in penetrating those geographies.
- Abbott enjoys the benefits of its extensive roster of well-known, reputable nutritional brands.
- Clinical data on drug-eluting stents and alternative therapies have put a crimp in percutaneous coronary procedures, as medical therapy and coronary bypass have gained favor.
- Abbott faces an uphill battle in the diagnostics arena where it must go head-to-head against market leader Roche, along with energetic upstarts like Qiagen and Hologic.
- Considering the heterogeneity involved in mitral valve disease, we are skeptical MitraClip will move beyond niche use for certain inoperable patients.
- Abbott's nutritional segment is unlikely to see much growth in the developed markets.
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