As COVID-19 Enthusiasm Fades, Abbott Labs Worth Closer Watching

 

I wasn’t all that bullish on Abbott Labs (ABT) back in the summer of 2020, as although I view this as a very high-quality med-tech company, the valuation seemed too rich. Add in my concerns about COVID-19 testing contraction in 2021 and beyond (something I’ve mentioned in reference to Agilent (A), Hologic (HOLX), and Thermo Fisher (TMO) among others more recently), and I didn’t like the set-up for the shares.

Since then, the shares have risen about 12% - less than half the gain of the S&P 500 and about 700bp shy of the larger med-tech group. That’s not quite enough to put Abbott in my “unfairly cheap” bucket just yet, but the prospective long-term return is now closer to the high single-digits and that’s enough to get my interest. Add in M&A optionality, and this is definitely a name to watch, if not consider outright.

 

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As COVID-19 Enthusiasm Fades, Abbott Labs Worth Closer Watching

Abbott Labs Leveraging An Opportunity In Diagnostics While Looking Forward To Normalization

While I thought Abbott Labs (ABT) was relatively well-placed relative to its peers through the Covid-19 pandemic with my last update, I also thought that the valuation was pretty full overall. Since then, the shares have done a little better than peers like Becton Dickinson (BDX), Boston Scientific (BSX), and Medtronic (MDT), but not all that well compared to the S&P 500 (lagging by about 13%), and that’s with a better-than-expected second quarter and enough management confidence to give some guidance on full-year earnings.

There are certainly positive drivers here, including ongoing long-term growth in MitraClip procedures, long-term growth in the diabetes franchise, and further opportunities in diagnostics from the Covid-19 pandemic. I also like Abbott’s organizational flexibility, including its willingness to do both big acquisitions and big divestitures/spin-offs. My issue is just the valuation – the stock looks priced for a mid-single-digit annualized return that I just don’t find that interesting (though there aren’t a lot of bargains in big-cap med-tech).

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Abbott Labs Leveraging An Opportunity In Diagnostics While Looking Forward To Normalization

Abbott Labs' Diversification And Diagnostics Leverage Paying Off Now

As everyone scrambles to figure out what Covid-19 will mean for health care providers, patients, and companies, Abbott Labs (ABT) is carrying on pretty well, with the shares up on a year-to-date basis, helped by a strong first quarter report. While Abbott is definitely going to see a hit from deferred procedures in areas like cardiac rhythm management, vascular, electrophysiology, and neuromodulation, close to half of the business is more consumer-focused (and likely to hold up better) and the diagnostics business is likely to prove key to getting the U.S. economy back open and on its feet.

As a huge and well-followed company, it doesn’t surprise me that this is now reflected in the share price. Relative to a stock like Stryker (SYK), which is likely to see a much bigger near-term hit to procedure deferrals, Abbott doesn’t look so interesting on a long-term basis, though I won’t understate the possibility that diagnostics could drive some upside from here.

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Abbott Labs' Diversification And Diagnostics Leverage Paying Off Now

When It Comes To Danaher, 'More Of The Same' Is Usually Pretty Good

With Danaher’s (DHR) strong leverage to life sciences and diagnostics, and recurring revenue, the company is in a good place as the economy goes through its cyclical shifts. Moreover, the company has the luxury to invest for growth without really compromising its core quality, and the balance sheet leaves open the possibility for further growth-driving M&A. The “but” is that the company’s shares are typically richly valued and today is no exception. Although Danaher’s valuation isn’t so unreasonably by the elevated standards of life science tool companies, investors should at least realize they’re paying a premium for Danaher’s perceived quality and cyclical resilience.

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When It Comes To Danaher, 'More Of The Same' Is Usually Pretty Good

The Motley Fool: Why Google Could Transform How We See

Google (NASDAQ: GOOGL  ) (NASDAQ: GOOG  ) has started making a significant push into wearables, with medical/health care-related applications among the prime targets. Some readers may already have heard of the company's efforts to develop a glucose-sensing smart contact lens that could continuously monitor glucose levels and interface with mobile devices, allowing diabetics more freedom and convenience.

Count eye care giant Novartis (NYSE: NVS  ) among those who have noticed. Novartis and Google announced on Tuesday that they would work together on smart contact lenses targeting both glucose monitoring and presbyopia. It's hard to say how close to reality (or clinical trials) a functional device might be, but this partnership just may change the landscape of the glucose monitoring market presently dominated by companies like Johnson & Johnson (NYSE: JNJ  ) , Abbott Labs, Roche and Medtronic.

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Why Google Could Transform How We See

The Motley Fool: Heavy Static At Danaher Corporation

"What we've got here is ... failure to communicate," Cool Hand Luke.

As one of the best-loved conglomerates out there (and seldom a cheap stock as a result), Danaher (NYSE: DHR  ) operates to a different set of Wall Street expectations than most companies. In the case of second quarter earnings and forward guidance, disappointing results in the volatile test & measurement business not only sent the stock down but will likely renew calls for management to consider breaking up the company. Perhaps adding a bit of irony to that, analysts also continue to express frustration that Danaher isn't making bigger splashes with its M&A efforts.

Danaher is Danaher, and the company will be fine. The diagnostics business is getting stronger and operations like water quality/treatment have strong growth potential in markets like China and India. Though I can't say that the shares have reached a bargain price yet, this may be a name to add to the watchlist in case the disappointment coming out of this quarter leads to a more pronounced skid.

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Heavy Static At Danaher Corporation

The Motley Fool: Abbott Labs Stock Earnings: Why Steady Isn't Enough

The "hurry up and wait" goes on at Abbott Labs (NYSE: ABT  ) , as it does at many other large med-tech companies, but Abbott is at least showing some growth momentum and the comps for the second half of the year should lead to better reported results. Abbott has also been busying on the M&A front, recently announcing a deal with Mylan (NASDAQ: MYL  ) that shifts the company's Established Pharmaceuticals business firmly toward faster-growing emerging markets. What the company will do about its device business is still an open question and how management addresses it will be something to watch for the remainder of the year.

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Abbott Labs Stock Earnings: Why Steady Isn't Enough

The Motley Fool: Abbott And Mylan: Winners and Winners?

Sometimes companies find that they have overlapping needs, and such was the case recently in the drug world. Abbott Labs (NYSE: ABT  ) was looking to reinvigorate its branded generic drug business, while Mylan (NASDAQ: MYL  ) wanted to join the parade of companies that have redomiciled in Europe to avoid taxes. The two companies came together on Monday in a $5 billion deal that will see Abbott sell its developed market drug business in a stock transaction that also gives Mylan the European tax base it wanted.

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Abbott And Mylan: Winners and Winners?

The Motley Fool: Good News at Boston Scientific: What's Next

Flashy moves aren't always the best moves in med-tech. Medtronic (NYSE: MDT  ) shelled out big bucks for Aterial Vascular Engineering, CoreValve, and Ardian, and the first two led to significant patent infringement issues and the third may never lead to a marketable product (renal denervation). I don't want to pick on Medtronic alone, as Hologic, Johnson & Johnson, and Boston Scientific (NYSE: BSX  ) have all made some big deals that went south and squandered shareholder capital.

With that in mind, I like the recent updates from Boston Scientific. Between two clinical trial updates and a small acquisition, Boston Scientific is laying the groundwork for what should be some good incremental revenue and profit growth in the coming years. I don't believe these items are enough to vault the company's stock to the level of great buy, but they are positive developments nevertheless.

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Good News at Boston Scientific: What's Next

The Motley Fool: Is Becton, Dickinson and Company a Buy?

The general theme of med-tech earnings through this cycle seems to be that the market has gotten a little bit ahead of many of the companies, leading to earnings reports that the sell-side characterizes as "slightly disappointing." Among those is Becton Dickinson (NYSE: BDX  ) , a generally reliable company that is structured more for long-term performance than short-term growth. Analysts seem focused on the weak results in diagnostics, but the overall picture hasn't really changed all that much.

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Is Becton, Dickinson and Company a Buy?

Seeking Alpha: Cepheid's Results And Shares Are On Different Paths

Within the higher-growth molecular diagnostics segment of diagnostics, Cepheid (CPHD) remains one of the real up-and-comers. Roche (OTCQX:RHHBY) still has quite a bit more market share than Cepheid (and/or anybody else), but Cepheid stands shoulder to shoulder with big names like Abbott (ABT), Becton Dickinson (BDX), and Hologic (HOLX) and actually has leading share in terms of systems placement. Margins are still a "build it and they will come" sort of proposition, but as Cepheid continues to develop and launch high-volume tests, it should be in position to reap significant leverage down the road.

The concern here is that the market is already a long ways down that road in terms of valuation. Even if the company can more than double its share of the MDx market and generate FCF margins on par with the best companies, the shares are already well ahead of the implied value. Assigning Cepheid the typical top-of-the-range med-tech growth multiple of 8.0x forward sales produces a more attractive $55 target, more than 20% above today's price, but that multiple may be harder to maintain if the market really is turning away from aggressive growth stories in the healthcare space.

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Cepheid's Results And Shares Are On Different Paths

The Motley Fool: Abbott Labs Earnings: Still Marking Time

Like many other large med-tech companies, Abbott Labs (NYSE: ABT  ) remains an exercise in frustration right now. There are pressures throughout most of the company's business lines, with only the diagnostics business really showing much growth. Although Abbott's results were a bit weak compared to expectations, analysts and investors knew that the company was going to go through this lull and longer-term expectations are still fairly bullish.

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Abbott Labs Earnings: Still Marking Time

Seeking Alpha: Hoya's Prospects Brightened By Life Care

As the computer and display-weighted technology businesses stabilize and the life care/health care businesses grow, Hoya's (OTCPK:HOCPY) prospects have improved. Sell-side analysts still seem to have relatively restrained revenue growth expectations, despite double-digit growth in life care today, significant untapped potential in emerging markets, and both a balance sheet and cash flow profile that could support acquisitions to drive further growth.

Valuation is a little more complicated. With the shares up almost 70% over the past year (the Tokyo-listed shares, that is), the valuation is not quite so compelling but I wouldn't say the shares are overvalued. Consistently solid returns on capital would argue for an attractive discount rate, and the sell-side may well be underestimating the company's ability to grow both sales and profits.

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Hoya's Prospects Brightened By Life Care

Seeking Alpha: OraSure Seems Too Cheap Relative To Infectious Disease Opportunities

Investors can be a fickle bunch. While they will happily reward strong growth stories with eye-popping valuation multiples, they can be demanding when it comes to the timing of that growth and the marketing/investment spending that the company has to do to generate it. That's my basic thesis on OraSure (OSUR), as the shares of this rapid point-of-care (or PoC) testing specialist seem undervalued relative to other diagnostics growth stories.

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OraSure Seems Too Cheap Relative To Infectious Disease Opportunities

The Motley Fool: Becton, Dickinson & Co Poised To Be A Large-Cap Growth Leader

When the worst thing you can say about a company is that its stock doesn't look very cheap, that's not a bad situation. It is challenging for me to see substantial undervaluation in Becton Dickison (NYSE: BDX  ) these days, even given the company's excellent share in safety devices, pre-filled syringes, and autoinjectors, and above-average growth in emerging markets. Although I'd be in no rush to sell, I would suggest investors keep an eye on the changes under way throughout the diagnostics industry.

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Becton, Dickinson & Co Poised To Be A Large-Cap Growth Leader

Seeking Alpha: Echo Therapeutics Facing Major Execution Risks In A Very Competitive Market

I go back a long way with the diabetes space, and glucose monitoring in particular, as that was a big part of my coverage group back in the sell-side research days. During that time, there was the occasional MiniMed (acquired by Medtronic (MDT)) or TheraSense (acquired by Abbott Labs (ABT)), but quite a few Integs for every one of those successes. Today, Echo Therapeutics (ECTE) is grinding along, hoping that its Symphony tCGM System vaults it into the winner's circle with existing glucose monitoring companies like Medtronic, Abbott, and DexCom (DXCM) and not into the scrap heap of failed testing companies.

I have very mixed feelings about this stock. The company has handled its financing needs with about as little finesse as possible, but the company has swapped out the CEO who oversaw those funding rounds. The company's device seems accurate enough to garner FDA approval, but the FDA has a habit of moving the bullseye on companies in this space, and I don't really have a good answer for how Echo will compete against the entrenched players and position the Symphony as the go-to system. All of that suggests to me that this is a binary outcome with a very uncertain future.

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Echo Therapeutics Facing Major Execution Risks In A Very Competitive Market

The Motley Fool: Danaher Corporation Rarely Cheap, But A Proven Winner

If you're looking for a well-run conglomerate trading at a significant discount to fair value, you're probably going to pass over Danaher (NYSE: DHR  ) . That's typically the case, though, as this company's demonstrated strength in generating margins, cash flow, and returns on capital makes it a perennial favorite with institutional investors.

Even if the expected returns from the stock don't meet your hurdle rate today, Danaher looks like a good name for a watch list. Management has over $8 billion in dry powder for M&A activity and a clear desire to do a large deal (or two). Combine that with a turned-around diagnostics business and underappreciated growth opportunities in product ID and water treatment, and this is a company with solid long-term prospects.

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Danaher Corporation Rarely Cheap, But A Proven Winner

Seeking Alpha: Great Growth Doesn't Come Cheap With Cepheid

Investors looking for good plays in the diagnostics space have some difficult choices to make. High-quality companies like Becton Dickinson (BDX) or Trinity (TRIB) don't come all that cheap, while others like LipoScience (LPDX) have some serious issues to address. Cepheid (CPHD) is definitely in that former camp, as the company's GeneXpert system is an excellent automated molecular diagnostics platform that has garnered leading share in hospital-acquired infections and continues to leverage new test launches.

Cepheid is expensive by almost any metric, but med-tech investors are willing to pay for growth and Cepheid's strong share and differentiated platform could yet attract strategic buyers. These shares are definitely vulnerable to any operational stumble, not to mention a sudden shift in market sentiment regarding the appropriate premium for growth, but I wouldn't step in front of them (to short), nor would I rush to sell if I owned them.

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Great Growth Doesn't Come Cheap With Cepheid

The Motley Fool: Boston Scientific Corporation Needs Growth And Execution

Diversified large cap med-tech Boston Scientific (NYSE: BSX  ) has made meaningful progress in cleaning up its act, and the Street has returned to the stock in force, pushing the stock up almost 70% over the past year and over 100% over the past two years. That sort of performance has left rivals like Medtronic (NYSE: MDT  ) , Abbott Labs (NYSE: ABT  ) , and St. Jude Medical (NYSE: STJ  ) well in the dust, but now it's time to deliver. Can Boston Scientific actually produce the growth and margin improvements that have underpinned so much of this optimism?

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Boston Scientific Corporation Needs Growth And Execution

The Motley Fool: Wall Street Less Forgiving Toward Abbott Laboratories This Time

With stocks like St. Jude Medical, Boston Scientific, Medtronic (NYSE: MDT  ) , and Johnson & Johnson (NYSE: JNJ  ) so strong in 2013, Abbott Labs (NYSE: ABT  ) has been tapped by many sell-side analysts as a catch-up pick for 2014. For the second straight quarter, though, Abbott has come in a little shy of growth expectations. Although the excuse was reasonable (the ongoing impact of Fonterra recalls on nutrition), there's not a lot of tolerance in Abbott's valuation model for ongoing shortfalls.

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Wall Street Less Forgiving Toward Abbott Laboratories This Time