Abbott Laboratories

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Abbott is a global healthcare company that develops, manufactures, and sells a wide array of products across diagnostics, medical devices, pharmaceuticals, and nutritional products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Abbott is a large and diverse healthcare company. It is difficult to make sense of the many segments without in-depth analysis, making it a bit complicated.

Business Overview

Abbott’s operations are segmented into four main divisions: 1. Established Pharmaceutical Products: This segment includes a range of generic pharmaceuticals and branded generics sold internationally, focusing on chronic conditions, gastrointestinal issues, and respiratory illnesses. 2. Diagnostics Products: This segment offers a wide range of diagnostic products for various conditions, including blood and plasma screening, rapid diagnostics, and molecular diagnostics, used in hospitals and laboratories worldwide. 3. Medical Devices: This division focuses on medical devices designed to treat heart rhythm disorders, vascular conditions, and structural heart problems, including neuromodulation and electrophysiology products. 4. Nutrition Products: The last group is for nutritional products designed for both adults and children, including formulas, nutritional supplements, and related devices.

The company’s revenue breakdown shows that sales are distributed across various geographical regions: The U.S. market accounted for 38.3% of sales in 2022 while international markets made up the rest, with Latin America, Europe and the Asia Pacific regions being the most notable. This makes Abbott a global company that is heavily exposed to international markets and therefore, its earnings can be impacted by the currency effects.

For 2023, Abbott’s performance showed that revenue declined 2.4% y/y, however, this was attributed to reduced revenue from covid testings. Organic revenue (excluding foreign exchange effects) increased 11.1%, demonstrating underlying strength. The company is guiding for 10% core operating growth with double digit sales growth in Medical Devices.

*   The healthcare industry is marked by constant innovation, technological advances, and regulatory scrutiny. This means it is harder to maintain an edge and companies are more prone to disruptions if they fall behind in technology or have issues complying with regulations.
*   The pharmaceutical sector is known for fierce competition and price sensitivity due to generic drugs, leading to pressure on branded products.
*   The medical device industry is marked by high barriers to entry due to stringent approvals and research costs, which can limit competition.
*   The nutrition sector has high brand power, and a small pool of well-established players, this means it will take a huge effort for any new entrant to displace the existing players.
*   Abbott faces competition from other healthcare giants, particularly in the areas of pharmaceuticals, medical devices, and diagnostics, with key competitors such as Medtronic, Johnson & Johnson, Roche, and Siemens.

What Makes Abbott Different? 

*   **Diverse Portfolio:** Abbott operates across multiple healthcare segments, which provides diversification and stability during economic or industry downturns.
*   **Global Presence:** Abbott has a vast international reach, giving access to multiple markets and reduces its reliance on any one economy.
*   **Innovation Focus:** The company actively invests in R&D, to develop new products in medical devices, pharmaceuticals, and diagnostics segments.
*   **Established Brands:** Abbott is known for its household brands like Ensure and Similac, which enjoy strong consumer confidence and brand power, providing a moat in the nutritional business.

Financial Analysis

Financial analysis is tricky, because it is hard to assess the performance of each division without a detailed segmentation, which is not easily available in the annual report. The company usually combines different segments into 4 larger groups which are provided in the reports.

  • Revenue: Abbott’s revenue has shown consistent growth over the past decade, with minor fluctuations year to year, and this is particularly true when factoring out covid testing.
  • Profit Margins: The company typically boasts a net margin between 10 and 14%, however, this can vary based on the year and segment mix.
  • Cash Flow: The company generates large free cash flow and positive earnings, allowing it to invest in long-term development and also return capital to shareholders through dividends and share buybacks.
  • Capital Structure: Abbott uses a combination of equity and debt to fund its operations. It’s leverage is not excessive and can be considered adequate.
  • Historical Trends: Over a 10 year span the company has shown relatively steady growth in the revenue stream, earnings, and returns.

The latest earnings call by Abbott, for Q2 2023, revealed that sales growth came in at 10.1% y/y, organic growth was at 11.1% and adjusted earnings per share was $1.43. The company is expecting to have adjusted EPS for the full-year of around $4.30 - $4.50.

Recent Concerns and Issues

  • The company’s nutritional segment has experienced a decline because of a manufacturing plant shutdown and a recall of certain products. However, management has made it clear that they are back on track to meeting the demand.
  • The company has been impacted by foreign exchange movements on sales and earnings. However, management claims that they have been improving efforts to hedge against these effects.
  • Abbott also faces the usual challenges related to competition, price pressures, and regulatory changes.

Moat Rating: 3/5

While Abbott boasts some strong competitive advantages, such as a diversified portfolio and notable brands in the nutritional and diagnostics space, certain threats are apparent, such as technological disruption, and stringent regulation on pharmaceuticals, which limits it’s moat. This results in the following justification for the rating:

  • Intangible assets (brands, patents, and regulatory licenses): Abbott has some strong brand names in the nutritional and diagnostics segment. However, the patent portfolio is not as broad, and the regulatory aspects are not strong enough to give it a truly defensible moat. As mentioned, competition is fierce and prices are often limited by government regulations.
  • Switching Costs: Switching costs are relatively low for customers, especially in the pharmaceutical and nutrition sector. There are some switching costs when it comes to the medical devices and diagnostics divisions, due to the high time and economic commitment it requires for the customers to change to a new device or diagnostic system. * Network Economics: Network effect is not applicable for the company’s offerings as a whole.
  • Cost Advantages: The company has some cost advantages, mostly stemming from economies of scale and its global distribution network.
  • Overall, these factors combine to create a narrow moat that allows the company to maintain superior profitability and growth, but is not wide enough to keep the competitors completely at bay.

Understandability: 2/5

  • Abbott’s diverse business lines and global presence make it more challenging to grasp.
  • The complex regulatory environment and constantly changing product mix add to the difficulty in keeping track of the business’ prospects and challenges.
  • The intermingling of different business segments makes the understanding of the business more difficult for a person outside of finance. * While the general idea of the company’s offerings is easy to understand, assessing the intricacies of its operations and competitive positioning is more difficult.

Balance Sheet Health: 4 / 5

  • Abbott has a solid balance sheet with a combination of debt and equity, making the leverage not excessive, which is suitable for large multinational corporations.
    • While there is some debt on the balance sheet, it does not cause any concerns as it is properly managed and is not too much for its massive size.
  • It also generates a high free cash flow which allows it to fund its businesses and also make payments to its shareholders.