Abbott Labs: Diagnosing Growth in 2017

 | Jan 03, 2017 | 12:00 PM EST
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Back in September, I thought Abbott Labs (ABT) could hit $48. With the stock ten points below my target, is there any hope I'll ever be right? Can Abbott Labs be cured of a low stock price?

Shares of Abbott Labs are 15.6% off their 52-week high, set last August. The stock is down 12.3% in the latest one-year period -- and nowhere near my target of $48.

On Apr. 28, Abbott announced the acquisition of St. Jude Medical (STJ) for $25 billion. The merger will create a medical device market leader, with either the No. 1 or No. 2 positions in many products in the $30 billion worldwide market for cardiovascular devices. St. Jude offers products across the entire spectrum of cardiology, including heart failure and atrial fibrillation.

The Federal Trade Commission said Abbott agreed to divest two medical device businesses to settle charges that the St. Jude deal would be anticompetitive. The FTC said the merged company would hold nearly 70% of the market for vascular closure devices.

In addition, the firm would hold a monopoly on "steerable" sheaths, which are used to guide catheters for treating heart arrhythmias.

The companies have agreed to sell the Vado steerable sheath business and the Angio-Seal and FemoSeal vascular-closure products to Japanese medical equipment maker Terumo Corp for $1.1 billion.

The St. Jude merger is set to close on Jan. 4. Last week the company told analysts the deal will be accretive to ABT's adjusted earnings per share in the first full year, with $0.21 accretion expected in 2017 and $0.29 in 2018. The combined companies are expected to save over $500 million by 2020 in operational costs and sales expense.

Abbott will report fourth-quarter fiscal 2016 results on Jan. 25. Analysts are expecting earnings of $0.65 per share on revenue of $5.395 billion.

Looking forward, on a pro forma basis, the consensus is anticipating 2017 earnings of $2.42 per share and revenue of about $22 billion.

If those estimates are accurate, that should put Abbott on the path to 10% earnings growth and sales growth of 5% to 6%, which should give the stock a higher valuation.

If the stock doesn't turn around and head higher in the next few months, then it will be pretty clear that investors want more top-line growth. Maybe the St. Jude deal doesn't provide enough growth -- and it won't be the cure for a low stock price. We shall see.

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