Abbott Shows Strong Growth in Emerging Markets

Abbott Laboratories ABT reported solid second-quarter performance that underscored the strength of its presence in emerging markets, where robust growth continues. While second-quarter results have not spurred a change in projections for the rest of this year or 2014, we may see $40 per share, which was primarily driven by a lower cost of equity assumption. Considering the breadth of new Abbott’s remaining businesses, the steadiness of the firm’s presence in those markets and its relative resistance to system risk,  lowering the cost of equity is appropriate for this narrow-moat company.

Reductions in share count and time value of money also contributed to a new valuation. With total quarterly revenue growth clocking in at 4.2% in constant currency, Abbott was able to offset weakness in the United States with solid growth in international markets. Importantly,emerging-market sales accounted for 42% of Abbott’s total second-quarter revenue, which puts the firm in a good position to benefit from the double-digit growth in those geographies. Abbott’s relatively early entry into emerging markets now make it an object of envy, as other medical device companies—such as Stryker and St. Jude—seek to build out footprints in those markets.

Similar to the pattern seen last quarter, strong growth in Abbott’s nutritional and diagnostic segments compensated for lackluster results in branded pharmaceuticals and medical devices. Operating margin gains in the first quarter seem to have held up through the second quarter. There is plenty of room for improvement on this measure and many will be looking for steady gains going forward. It was disappointing to see second-quarter gross margin fall by approximately 200 basis points year over year. However, lower selling, general, and administrative costs more than offset the rise in manufacturing.

We were not surprised to see Abbott initiate the recent acquisitions of OptiMedica and Idev Technologies. Thanks to the cash that AbbVie brought in, Abbott is in good shape to go shopping for new technologies, and the firm needs to incorporate some new growth drivers. On the whole, we think the new additions fit well strategically with Abbott’s existing portfolio, but may not be sufficient to catapult Abbott into a leadership position in the cataract or peripheral stent markets. For example, drug-eluting balloons seem to hold potential for addressing some of the long-standing problems of current treatments for peripheral artery disease, including fracturing of stents and restenosis.

Both CR Bard and Medtronic are pioneering drug-eluting balloons for peripheral use, but it doesn’t look like Abbott has joined them on the leading edge. Further, if drug-eluting balloons eat into peripheral stent usage, that would leave Abbott vulnerable.

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