Taking Stock: Abbott Labs

Dear Mr. Berko:
I’m new to the stock market and my broker has recommended that I buy 70 shares of Abbott Laboratories. Please tell me about this stock and let me know if you think this is a stock for conservative people. If I buy the stock I would hold it for a long time and hopefully in 10 or 15 years it could be worth a lot more than it is today. My Dean Witter broker also told me to reinvest the dividend.
K.L., Durham, N.C.
Dear K.L.:
I like your broker, and I think he’s giving you supercalifragilistic advice. Abbott Labs (ABT-$46.10) is on track for another year of double-digit income growth and should report earnings of $4.17 per share, up 12 percent from 2009’s $3.72. And if the forces of good prevail over the forces of evil, ABT’s double-digit income growth will continue to prevail. The current $1.76 dividend yields 3.7 percent. And according to the brainiacs at UBS and RBC Capital, 2011 earnings should grow l4 percent to $4.74, followed by a 10 percent increase in its dividend to $1.94 per share. And I think your Dean Witter broker is recommending one of the finest drug stocks east of Chowchilla, Calif.

Ten years ago, ABT posted $13 billion revenues. This year, revenues will surpass $35 billion. Ten years ago, ABT’s book value was $5.21 per share. Today that book value is $15.60. Ten years ago, ABT’s free cash flow was $2.34 per share. Today, it’s $5.89. And ten years ago, ABT’s high stock price was $57 per share. This year’s high price is also $57 per share. Ten years ago, ABT was trading at an atmospheric 27 times earning. Today, ABT’s P/E seems grounded at just over 10.

And while ABT’s stock price has been mighty disappointing to many long-term investors, I think the low P/E represents a modestly attractive opportunity for new conservative growth and income investors.

ABT operates four distinct divisions: (1) pharmaceuticals – 54 percent of revenues with an impressive product line of adult and pediatric pharmaceuticals that are steady growers; (2) diagnostic systems – tests for blood banks, physicians offices, laboratories and hospitals represent 12 percent of revenues; (3) nutritional products that include Similac, Ensure, Isomil, Glucerna – l7 percent of revenues; and (4) vascular products from coronary, endovascular and vessel closure – 9 percent of revenues. And in 2008, ABT vascular products received FDA approval for Xience V, the company’s only drug-eluting stent. And the remaining 8 percent represent an olla podrida of related “thises” and “thats.”

Now, Xience V may soon be replaced by ABT’s new Vanishing Stent, which could decimate the stent sales of rivals Johnson & Johnson, Medtronic and Boston Scientific, giving ABT nearly total control of this $4.5 billion stent market. The dissolving stent is made from an organic substance called polylactic acid, and over 20 to 24 months, it dissolves into lactic acid (a natural body chemical) leaving behind (hopefully) a healthy artery. This appeals to lots of folks who don’t like keeping hardware in their bodies.

This new stent and ABT’s recent acquisition of Solvay and Primal Pharmaceuticals are strengthening its position in international markets. Along with a recent 3,000 reduction (more to come) in its work force, a strong R&D program and exceptional management, many suggest that ABT will move up and out of its trading range. Several analysts believe that ABT could double its share price in the coming five to seven years. But I’d be pleased with a 60 percent gain including dividends, which what I think ABT can do.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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