18 Jul

Abbott Labs Stock Gains on Q2 Earnings Beat

WRITTEN BY Margaret Patrick

On Wednesday, Abbott Labs stock was up 3.13% from Tuesday’s close at $85.76 on the company’s earnings beat for the second quarter. Abbott Laboratories (ABT) non-GAAP EPS beat the consensus by $0.02. This performance is noteworthy since the Abbott missed the consensus revenue estimate by $17.66 million.

On Wednesday, Abbott Labs’ closing price was up 18.57% from January 1, 2019. Since July 1, Abbott Labs stock has risen 1.89%. The stock had also jumped 18.11% since Abbott reported its Q1 earnings on April 17.

Key updates driving Abbott Labs stock

On Monday, Abbott Laboratories announced FDA approval for its next-generation MitraClip heart valve repair device, the MitraClip G4. This device treats leaky mitral valves that cause mitral regurgitation.

On July 11, the FDA approved Abbott’s Alinity S system for faster screening of blood and plasma in smaller spaces.

On June 17, the company announced the launch of its rapid point-of-care Afinion HbA1c Dx test for diagnosing diabetes. This assay works with the Afinion 2 Analyzer and Afinion AS100 Analyzer.

Abbott Labs stock faced some heat after President Trump announced plans to issue an executive order about his “favored nations” policy. The administration could require the US to secure the lowest drug prices by any manufacturer or developed country. This policy pushed Abbott Labs stock price down from $85.10 on July 5 to $84.77 on July 8. However, the reaction seems unwarranted. Abbott no longer sells drugs in the US or any developed market.

Abbott Laboratories’ second-quarter earnings performance

On Wednesday, Abbott Laboratories reported its second-quarter earnings results before the market opened. It reported revenues of $7.98 billion, up 2.73% year-over-year on a reported basis. Revenues rose 7.5% on an organic basis, in line with Abbott’s Q2 guidance of 7%. Abbott reported non-GAAP EPS of $0.82, up 12.33% year-over-year. This performance came in higher than its Q2 EPS guidance of $0.79–$0.81. Abbott saw an impact of -3% on sales from foreign exchange movements. It had forecast a 4% impact on the Q1 earnings call.

Abbott’s adjusted gross margin was 59.4%. This level was in line with the company’s Q2 adjusted guidance of more than 59%. The company reported an adjusted R&D-to-sales percentage of 7.1%. This number was also in line with its guidance of less than 7.5%. However, Abbott’s SG&A-to-sales percentage came in at 29.9%—higher than its guidance of 29.5%.

Abbott Laboratories’ guidance for fiscal 2019

On the Q2 earnings call, Abbott raised its year-over-year organic sales growth guidance from 6.5%–7.5% to 7%–8%. The company also increased its estimate for its foreign exchange movement from -2.5% to -3%.

Abbott Laboratories reduced its fiscal 2019 gross margin guidance from a little above 59.5% to a little below 59.5%. This change partly reflects its increasing investments to support the rapid uptake of its Alinity diagnostic systems. Plus, the company is investing significantly to expand manufacturing capacity for its continuous glucose monitor, the FreeStyle Libre.

Abbott maintain its guidance for an adjusted SG&A-expense-to-sales percentage around 29.5%. It reduced its guidance for adjusted R&D-expenses-to-sales from around 7.5% to less than 7.5%. The company guided for an adjusted tax rate of 14.5% in fiscal 2019.

Based on these estimates, Abbott Laboratories expects fiscal 2019 adjusted diluted EPS of  $3.21–$3.27. This range is higher than its previous guidance of $3.15–$3.25. To learn more about what’s driving Abbott Labs stock, see Here Are the Key Growth Catalysts for Abbott Laboratories in 2019.

Guidance for the third quarter

On the Q2 earnings call, Abbott guided for year-over-year organic sales growth of 7%–8% in the third quarter. The company expects a sales impact of -1.5% due to forex movements. Abbott expects its adjusted gross margin to be slightly under 59.5%.

Abbott expects an adjusted-SG&A-to-sales percentage around 29% for Q3. It also expects an adjusted R&D-to-sales percentage around 7.5%. The company expects adjusted EPS of $0.83–$0.85.

Abbott also expects its Established Pharmaceuticals segment to report mid- to high-single-digit revenue growth. The Nutrition business is slated to report mid-single-digit revenue growth. Meanwhile, the Medical Devices and Legacy Diagnostics businesses are should report high-single-digit revenue growth. For the Rapid Diagnostics business, Abbott expects low- to mid-single-digit revenue growth.

The Medical Devices segment

In the second quarter, Abbott’s Medical Devices segment reported worldwide revenues of $3.07 billion. This level meant a year-over-year rise of 10.5%. The segment reported revenues of $5.97 billion in the first half of 2019, up 10.0%.

The FreeStyle Libre is currently a small contributor to the segment’s overall revenues. But it has been one of Abbott’s fastest-growing products. The Libre reported revenues of $433 million in Q2, growing 63.9% year-over-year and 72.9% organically. At the end of Q2, the Libre was reimbursed for around 75% of patients with private health insurance. Abbott is focusing on expanding the Libre’s capacity.

The overall Diabetes Care business reported revenues of $602 million in Q2, a year-over-year rise of 28.2% on a reported basis and 35.3% on an organic basis. To learn more about the FreeStyle Libre, see FreeStyle Libre Is Multi-Billion Dollar Opportunity for Abbott.

Structural Heart is Abbott’s third-fastest-growing business in its Medical Devices segment. It comes in after Diabetes Care and Heart Failure. Structural Heart reported revenues of $352 million, up 11.9% on a reported basis and 16.6% on an organic basis. MitraClip sales were a major revenue contributor. In Q2, the MitraClip reported revenues of $169 million, marking reported growth of 26.7% and organic growth of 30.6%.

FDA approval for the next-generation MitraClip is expected to increase the company’s penetration in the underserved mitral regurgitation market. Plus, Abbott is working on more innovative technologies. These projects include the TriClip, Tendyne and Cephea, and Amplatzer Amulet.

The Diagnostics segment

In Q2, the Diagnostics segment reported worldwide revenues of $1.91 billion, up 6.2% year-over-year. The segment reported revenues of $3.75 billion in the first half of 2019, a rise of 5.3%.

Increasing penetration of Alinity systems should be a major revenue driver for the segment. Abbott’s strategy focuses on rolling out innovative assays and improved versions of its Alinity systems in developed markets.

Abbott Laboratories’ valuation

Abbott Laboratories is trading at a PE multiple of 57.71x. This level is significantly higher than most major medical device companies. Abbott has a higher PE than Medtronic, Stryker, Boston Scientific, and Baxter International.

Abbott Labs stock has an average target price of $92.31 from 21 Wall Street analysts. This price means potential upside of 7.64% over the next 12 months. 

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