Abbott Labs has had a roller-coaster year. After bouncing back from the recession and peaking in the mid-50’s, the stock has lost about 15% and has been fluctuating between $45 and $48 for the past 2 months. They recently published their 10-k for fiscal year 2010, so let’s take a look and see what’s going on.
Revenue growth was very strong, near 15% over 2009. Humira, one of ABT’s most lucrative drugs, had sales growth of over 1 billion alone, and its projected 2011 growth rate is in the low teens.
Operating Earnings and Margins
Gross margins remained stable, around 58%. Operating margin was not so lucky, and decreased from 20.3% in 2009 to 17.3% in 2010. ABT attributes some of this to it’s 2010 acquisitions and their restructuring, which increased selling, general, and administrative costs 23% and research costs 35%. Net margins also lost ground in 2010, decreasing from 18.7% to 13.2%.
These increased costs incurred by ABT took a toll on earnings, and eps dropped 19.7% from 2009, to $2.98 per share.
Dividend and Payout Ratio
Annual dividend increased 10% in 2010 to $1.76, and recently ABT announced another dividend increase, to $.48 per quarter. This amounts to an annual payment of $1.92, a 9.1% increase from 2010’s $1.76.
Based off of earnings, the payout ratio in 2010 was 59%, a bit high, but still well within acceptable range, especially for a company with 7 billion dollars in free cash flow and only 2.6 billion dollars in dividend payments. And this does not even account for the 3.6 billion dollars in cash and cash equivalents on the balance sheet.
Debt levels increased only marginally in 2010, from 41% of total capital to 45.7%. Again, a good deal of this is related to ABT’s acquisitions in 2010 of Solvay Pharmacuticals, Piramal Healthcare Solutions, STARLIMS Technologies, and Facet Biotech Corporation. An interest coverage ratio of 11 should more than suffice any debt-centric investors.
Every business has risks, and I find no need to discuss the commonplace, such as product safety issues and international currency fluctuations. What I do want to point out, and which I find interesting, is the effects of the new US healthcare law and European austerity measures.
In the US, the new healthcare law partially closed what is known as the “Medicare Part D Donut Hole.” Essentially, once your Medicare reached a certain payment threshold on prescription drugs, the patient was responsible for 100% of any new drug charges, until a higher threshold was reached, and “catastrophic coverage” took effect. Under the new 2011 law, patients will be responsible for only 50% of costs in the donut hole. The law effected Abbott by 260 million in 2010, and is expected to reach 400 million in 2011. We will have to wait and see how this plays out with a new (mostly) Republican Congress.
The second risk, European austerity measures, is an interesting one. 55% of Abbott’s sales are outside the US, and roughly 23% of them are to major European countries like Germany and the UK. Since many of these countries governments are responsible for providing healthcare, any austerity measure they implement will directly affect ABT and it’s businesses. How much money they cut from healthcare and health-related services is yet to be seen, but it is definitely something to keep a close watch on.
These hiccups ABT keeps experiencing are great opportunities to buy. Right now, ABT is yielding over 4%, and although you can find other drug manufacturers in that range right now (Eli Lilly, AstraZeneca) I think ABT’s diversified healthcare business is a winner. Analysts expect earnings of $4.59 in 2011, giving ABT a forward p/e of 10.2. I can easily see the price getting into the low 50’s, and coupled with a 4% yield, this is one drug that gets my heart pumping!
Full Disclosure: I do not own any ABT. My Current Portfolio Holdings can be seen here