Should You Pick Abbott Stock At $105 After A Solid Q2?

Abbott (NYSE: ABT) recently reported its Q2 results, with revenues and earnings exceeding our expectations. The company reported revenue of $10.4 billion and earnings of $1.14 on a per-share and adjusted basis, compared to our estimates of $10.3 billion and $1.10, respectively. The company saw strong growth for its medical devices business, while diagnostics sales trended lower. In this note, we discuss Abbott’s stock performance, key takeaways from its recent results, and valuation.

Firstly, looking at its stock performance, ABT stock has seen little change, moving slightly from levels of $110 in early January 2021 to around $107 now, vs. an increase of about 45% for the S&P 500 over this period. Overall, the performance of ABT stock with respect to the index has been lackluster. Returns for the stock were 29% in 2021, -22% in 2022, and 0% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that ABT underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ABT face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump?  From a valuation perspective, ABT stock looks like it has some room for growth. We estimate Abbott’s Valuation to be $119 per share, reflecting over 10% upside from its current levels of $107. This represents a 25x the company’s expected earnings of $4.68 per share in 2024. The 25x figure aligns with the stock’s average P/E ratio over the last three years. Abbott has raised its adjusted earnings per share guidance from $4.55 to $4.70 earlier to $4.61 to $4.71 now.

Abbott’s revenue of $10.4 billion in Q2 was up 4% y-o-y. The company reported a 10.2% jump in medical device segment sales, nutrition was up 3.5%, and established pharmaceuticals saw a 0.6% rise in revenue. Growth in these segments was partly offset by a 5.3% fall in Diagnostics revenues due to lower demand for COVID-19 testing. Excluding the COVID-19 tests, the Diagnostics sales were up 5.9%. Within medical devices, diabetes sales were up 15.8% led by FreeStyle Libre. Abbott expects its total 2024 revenue to rise 9.5% to 10% on an organic basis. The company saw its adjusted pre-tax income margin expand by 64 bps y-o-y to 22.7% in Q2. This resulted in a 5.6% rise in the bottom line to $1.14 on an adjusted basis.

Overall, Abbott posted upbeat results, with expansion of margins and upward revision for its full-year outlook. The stock has risen around 5% in the last five days, and we think it still has some room for growth.

[1] Returns as of 7/24/2024
[2] Cumulative total returns since the end of 2016

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