EUR 850.00 For Business Accounts Only

Morningstar | Abbott's Mix of Businesses Adds Up to a Narrow Economic Moat

Abbott has expanded its medical device footprint with the addition of St. Jude Medical and continued improvement in the profitability of its segments: nutritionals, devices, diagnostics, and established pharmaceuticals. Although Abbott has made progress over the last six years, it still lags key rivals on profitability measures despite competing in businesses that are characterized by attractive margins.Abbott's efforts to improve efficiency, including streamlining its distribution channels and building facilities in lower-cost locations like China and India, have demonstrated some success. But there is still room for improvement as we look at the company's consolidated profitability. We think Abbott's emphasis on margin improvement should pay off over the next five years.We like that management is turning its attention to new sources of growth. In our view, Abbott's new FreeStyle Libre blood glucose monitor offers compelling innovation, and we anticipate Abbott's substantial footprint in Latin America and Russia for its established pharmaceutical products should also deliver steady growth. We also applaud the sale of Abbott's EPP business in developed markets and the optics unit. This reshuffling puts Abbott in a favorable position to focus on the faster growing markets for branded generics in emerging markets. The addition of St. Jude's heart-focused portfolio (along with smaller tuck-ins) significantly broadens Abbott's cardiac device product offering, raising the firm's ability to compete as hospital clients seek to winnow suppliers.While we still forecast mid-single-digit revenue growth for Abbott, we think there is potential for the firm to goose growth with key product lines. In the meantime, we see more opportunities for Abbott to enhance efficiency and fuel earnings growth. Addressing this situation is low-hanging fruit that is largely under management's control. If Abbott can exceed our expectations and close the profitability gap with its competitive set, there is upside to our valuation.