A company stock analysis on abbott laboratories

Abbott Laboratories is among the companies listed in the New York, Chicago, Pacific, London and Swiss exchanges.  It is traded in the Boston, Cincinnati and Philadelphia exchanges.  As ABT common, shares of this company have been offered to the public for ownership and are presently traded in the mentioned bourses.  To be able to make a wise decision as to whether or not a prospective investor should buy into Abbott Laboratories,  sufficient information regarding its financial condition and operational well-being will have to be available and then looked into.

With the shares of Abbott Laboratories being in the market and available for buying any time during trading hours, present and prospective investors have to monitor the state of things, the rate of growth and the progress and prospects of the company.  This way, present investors can decide better whether to keep their shares or to sell them, then prospective investors can have a sound basis for deciding whether to acquire Abbott shares or to put their money elsewhere.

As stated in its 2006 Fact Book, Abbott Laboratories was founded in 1988 by Dr. Wallace C. Abbott, a Chicago physician.  Abbott Laboratories has become a multi-national enterprise and a broad-based, innovative health care company that discovers, develops, manufactures and markets products that span the continuum of care – from prevention and diagnosis to treatment and cure.

Abbott’s principal businesses include pharmaceuticals and medical products, including devices, diagnostic tests, instruments and nutritional products for children and adults.  Mr. Miles D. White, Abbot’s Chairman of the Board and Chief Executive Officer, in his message in the company website, has stated, “Our goal at Abbott is very straightforward:  to help the people who depend upon us by continuing to advance medical science.  We do this in many ways – through our products that directly help patients, through our advocacy for causes we believe in, and through our global humanitarian efforts that help people in need around the world.”

Abbott Laboratories is ranked among the top companies in the world for financial strength and workplace excellence by leading national publications.  The company currently holds the fifth rank among the “Most Admired Companies” in the pharmaceutical sector and the 93rd rank in the Fortune 500 list of the largest U.S.-based corporations.  It has been named in the top 10 of the “Top 50 Companies for Diversity” by DiversityInc.  Abbott has been ranked 106th in the Forbes 200 list.

The Working Mother publication has cited Abbott as one of the “100 Best Employers for Working Mothers.”   The Science magazine has included Abbott in its list of top 20 employers for scientists in a ranking of the world’s most respected biotechnology and pharmaceutical companies.  Then The Scientist magazine has listed Abbott among their best places to work in.  In the light of all these recognition and acknowledgments conferred upon Abbott Laboratories, there is no doubt that it is a major figure in the industry.

The company 2006 Fact Book – the most recent one published thus far - further states that for the year 2005, Abott reported sales and income from continuing operations of $22.3 billion and $3.4 billion, respectively.  Abbott also recorded its 328th consecutive quarterly dividend to be paid to share-holders since 1924.  In addition, 2005 marked the 33rd straight year Abbott’s dividends have increased.  Its medical products business – which includes Diagnostics, Nutritionals, Diabetes Care, Molecular, Point of Care, Vascular, Spine and AnimalHealth – generated more than $8 billion in sales.  The company’s pharmaceutical business – which includes U.S. and international pharmaceuticals – generated sales of more than $13 billion.

In the same 2006 Fact Book, the company claims that its leadership positions in several multibillion-dollar businesses provide a unique balance of revenue and growth opportunities and cash flow sources that allow the company to invest in its future.  In 2005, to further strengthen its business and sustain its success, Abbott invested more than $1.8 billion in research and development.  During 2005, Abbott’s operating cash flow from continuing operations was $5 billion.

Congruent to lines in the 2006 Fact Book, the company website says that Abbott Laboratories distributes pharmaceutical, nutritional, diagnostic and medical products in more than 130 countries worldwide.  With its headquarters located in the Abbott Park, North Chicago, Illinois, Abbott Laboratories employs over 65,000 employees across the globe,  all of whom share without question the same conviction of delivering to humanity the corporate slogan:  a promise for life.

Their corporate slogan, as detailed in the company website, is a statement that describes – for their customers, their communities, their shareholders and all their stakeholders – what they believe in, what they value, and what they strive to deliver in their day-to-day work.  For the company employees, it is the compass that guides them in their actions and decision-making to ensure that they live up to the high expectations they have set for themselves in order to serve better their stakeholders.  Their slogan – their “promise for life” – challenges them to continually improve and inspires them to always aim higher.

The company’s Annual Report 2006 claims that 2006 was a highly productive and successful year for Abbott.  Seen in the context of the long-term growth strategy that the company management has been executing, 2006 was a watershed year.  Abbott has a clear and compelling investment identity and is ready to deliver double-digit growth in the years ahead.  Thanks to the hard work and dedication of the people in their organization, Abbott Laboratories delivered consistently positive operating results in 2006, albeit the income figures and ratios for such year were lower compared to those in 2004 and 2005.

These details are to be covered by this paper through a thorough analysis of the company’s financial statements for the years 2004-2006.

The following graph depicts the stock market prices movement of ABT shares for the months of September, October and November in 2007.  For analysis purposes, the weekly prices of ABT during such period will be looked into in this paper.  Based on the weekly closing prices during such period, the lowest price of ABT shares was $51.40 which was for the week ended October 19 then the highest was $55.49 which, in turn, was the closing price for the week ended November 23.  Even during this sample period, the ABT shares were seen to be stable in price.  As such, the daily fluctuations of the shares were minimal and never breached the 10%  level in any given trading day.

With a market capitalization of $81 billion, millions of ABT shares change hands daily in the stock market.  The daily volumes on selected days are included in the table below.  As shown by the figures, there can be no difficulty in letting go of ABT shares currently owned.   Given the relative stability of ABT prices per share, the owners of ABT shares need not be prepared for surprisingly huge overnight dives of the stock prices.

ABT shares, therefore, are as good as cash.  Investing in ABT shares enables one to stay liquid;  it would be as if the investor has placed his money in a time deposit account that allows pre-termination.  There is very little danger of any investor having his money stuck in ABT.  If the decision to sell has been made, the stock market has regular buyers in the queue.

 Source:  Abbott Laboratories website

Abbott’s positive earning performance for the past years has been unquestionably consistent and satisfactory enough to merit “buy” recommendations from stock analysts.  In fact,  Value Line recommends that long-term, conservative investors should consider ABT shares.  Value Line contends that profits of Abbott are expected to grow at a double-digit pace over the pull to 2010-2012.

One basis for such forecast is that Abbott recently strengthened its broad-based pipeline and advanced several key programs into late-stage development.  In addition, the company has five major regulatory filings that are expected to be submitted for approval later this year.  These represent significant long-term growth opportunities.  Value Line as well is looking at continued dividend increases for shareholders of Abbott, which augurs well for 3- to 5-year total returns.

Indeed, Value Line has such optimistic views for ABT shares.  Having closed at $57.01 on December 4, 2007 at the New York Stock Exchange, ABT is projected to reach a high of $90 and a low of $75 during the years 2010-2012, representing increases of 58% and 32% from the given 12/4/07 closing price.  This means that even at its lowest projected market price, ABT is seen to bring in yield for the investor, both in terms of increases in market value of the stock investment and then of the dividends that are expected to be declared and paid by the company – just as it has done year-on-year for the past decades.

The weekly closing prices of Abbott shares in the stock exchange are detailed in the following tabulation, which as well shows the shares’ daily holding period return (HPR), and the movements in the same period of a selected mutual fund and then the appropriate market index.

Date (2007) Closing Price of ABT (in $) Volume Traded 9/21 54.44 7,262,300 9/28 53.62 4,011,627 10/05 55.00 6,709,300 10/12 52.64 8,109,749 10/19 51.40 7,715,900 10/26 54.07 5,684,200 11/02 54.05 5,302,500 11/09 54.12 6,338,100 11/16 55.21 6,468,885 11/23 55.49 2,075,950

The Holding Period Return (HPR) is the rate of return for a certain period during which you own an investment.  It is computed as the ending value of an investment divided by the beginning value of the same investment.  If we are to consider the period from September 21 to November 23, 2007, then we compute the HPR on Abbott shares for such period at $55.49/$54.44 or 1.02.  This means that for the 63-day period from 9/21 to 11/23, the investor who purchased ABT shares on 9/21 has earned 2% of his investment in the form of the increase in the market value of his ABT shares.

Two percent for 63 days can translate to approximately 12 percent for a year (365 days).  It is to be mentioned that stocks are subject to the volatility of the market as a general rule.  However, choosing ABT as the  company to invest in is a relatively conservative move.  Given the information provided about ABT, it is safe to project that the market prices of ABT shares have stable levels of fluctuation.

Meanwhile, the average returns generated by mutual funds seem lucrative.  As an example,  the Morgan Stanley China A Share Mutual Fund is currently priced at $52.13,  with $72.30 and $22.88 as the prevailing 52-week high and low prices respectively.  If an investor will choose to be optimistic and to anticipate that the mutual fund will soon breach its 52-week high level, then it is equivalent to projecting a $20-earnings or 38% returns on his investment.  If this is the returns that is to be compared with what is projected to be earned in the purchase of ABT stock without taking into consideration the annual dividends attached to ABT shares, it would seem attractive to park one’s cash in mutual funds.

Meanwhile, more analysis on the company stock of choice – ABT – can be undertaken.

One very important thing that investors look into before buying shares of a company is capacity of the company to generate profits, which would be translated as returns for the investment of the shareholders in the form of dividends – whether cash or stock.  To evaluate the profitability of a company, the following rates or ratios are computed and given a lot of consideration in deciding to invest or not to invest:  the profitability and margin ratios and the ownership ratios.

The profitability and margin ratios represent the relationships between income and sales or investments.  These ratios provide a basis for determining the ability of the company to be efficient in generating income from every dollar of sales revenue and to reward shareholders with profits and dividends.

The gross profit margin ratio reflects the company’s ability to recover its manufactured or purchased cost of merchandize from revenues.  It is computed as gross profit (sales less cost of sales) over or divided by net sales.  On the other hand, the net profit margin ratio is widely used as a measure of the overall profitability of operations.  It is computed as net profit (gross profit less operating and administrative expenses) over or divided by net sales.   The following is the computation of such ratios for  Abbott’s operations during the years 2004, 2005 and 2006:

(in millions, and in US $) 2006 2005 2004 Net Sales 22,476 22,338 19,680 Cost of Sales plus R&D and Selling and Admin Expenses 20,434 17,976 15,782 Operating Earnings (OE) 2,042 4,362 3,898 Interest, Other (Income) Expense and taxes 325 990 722 Net Earnings (NE) 1,717 3,372 3,176 OE Margin Ratio (%) 9.08 19.53 19.81 NE Margin Ratio (%) 7.64 15.09 16.14 Source (except for the ratios):  The 2006 Annual Report of Abbott Laboratories.

The ratios show that from 2004 to 2006, Abbott’s operating earnings margin ratio and net earnings margin ratio both declined as compared to their equivalents in 2004 and 2005.  However, these decreases have to be taken in a positive context.  Abbott invested heavily (spending over $4 million as compared to the usual less than $2 million) in research and development.  Benefits and returns from this investment should be reflected in the upcoming months.

The earnings per share  (EPS) of a company is one of the most important indications of its profitability.  It can easily be compared to the EPS figures of other companies, then it is a handy means for investors and stockholders to see the amount they have earned for a single share of stock.  The EPS can be computed by dividing the net income by the number of shares of the company.   In 2006, the EPS of  Abbott Laboratories is $1.12 while those for 2005 and 2004 were $2.16 and $2.06 respectively.  This decrease can be attributed to the same reason the income levels of the company were not of its usual level in 2006.

The price-earnings ratio is the ratio of the current price per share to the earnings per share (EPS) of stocks.  In formula form, it is calculated as the price per share divided by earnings per share (EPS).  With the calculation of the price-earnings ratio, financial analysts may overcome the difficulty of comparing different-priced shares of stocks.  By comparing the price-earnings ratio, one can easily see which stocks cost less for each invested unit of currency.  In other words, the price-earnings ratio indicates how many units of currency are required to buy a unit’s worth of earnings.

Particulars 2006 2005 2004 Earnings Per Share (in $) 1.12 2.16 2.06 Yearend Closing Market Price (in $) 48.71 39.43 46.65 Price-Earnings Ratio 43 18 23 Source (except for the ratios):  The 2006 Annual Report of Abbott Laboratories.

The current ratio is a tool to test the company’s liquidity.  Liquidity refers to the company’s ability to pay its short-term liabilities as they fall due.  No company can avail of long-term loans for expansion if it is proven that the company cannot even settle those with terms that are shorter than a year.

Meanwhile, the debt-equity ratio shows how much of the total assets of the company are provided by the stockholders’ investments and how much of them are provided by creditors. The bigger this ratio is, the less attractive the company becomes for banks and lending institutions.

Particulars 2006 2005 2004 Current Assets (in millions) 11,282 11,386 10,734 Current Liabilities (in millions) 11,951 7,415 6,826 Current Ratio 0.94 1.54 1.57 Total Liabilities (in millions) 22,124 14,726 14,441 Total Equity (in millions) 14,054 14,415 14,326 Debt-Equity ratio 61:39 51:49 50:50 Source (except for the ratios):  The 2006 Annual Report of Abbott Laboratories.

The current ratios of Abbott Laboratories for the years 2004 to 2006 are 1.57, 1.54 and 0.94 respectively.   This ratio shows that the company that is in a good position to easily take care of its current liabilities using its current assets.  In 2006, the current assets of the company turned out to be insufficient by only 6% to meet its current liabilities.  But this is still a relatively healthy balance between current assets and current liabilities. Companies are not advised to maintain high current ratios and in the cases of 2004 and 2005, the surplus of current assets over current liabilities is too minimal – less than one point – to even merit having to check on the management’s use of the company’s current assets.

Meanwhile, the company’s debt-equity ratios for the years 2004 to 2006 are above the industry norm which stays at 40:60.  These ratios show that Abbott Laboratories is considerably in debt.  Its total liabilities are higher than the total investments of its stockholders or owners.  This paints a risky picture for the creditors of the company. However,  the credibility of the company management and the long-standing good records of the company as a borrower may prevail and become more than enough reasons for the release of loans.

According to authors Frank Reilly and Keith Brown, beyond the original DuPont System, some analysts have suggested using an extended DuPont System which provides additional insights into the effect of financial leverage on the firm and also pinpoints the effect of income taxes on the firm’s return on equity.  Because both financial leverage and tax rates have changed dramatically over the last decade, these additional insights are important.  The computations using this DuPont System are as follows:

Particulars (in millions, except the ratios) 2006 2005 2004 Earnings before Income Tax (a) 2,276 4,620 4,126 Sales (b) 22,476 22,338 19,680 Total Assets (  c) 36,178 29,141 28,767 Interest Expense (d) 292 154 149 Common Equity (e) 4,291 3,477 3,189 Operating Profit Margin (a/b) 10% 21% 21% Total Asset Turnover (b/c) 62% 77% 68% Particulars (in millions, except the ratios) 2006 2005 2004 Interest Expense Rate (d/c) 0.81% 0.53% 0.52% Fin. Leverage Multiplier (c/e) 8.43 8.38 9.02 Source (except for the ratios):  The 2006 Annual Report of Abbott Laboratories.

Abbott’s average operating profit margin is around 20%.  The margin decreased by 50% in 2006 due to the aforementioned costs in research and development which the company management is banking on the effect a much greater increase in sales and net income in the coming years.  This setback, therefore, is confined to just 2006 and is not expected to recur as part of the ordinary operations of the company.

The interest expense rate increased in 2006 due to the new short-term borrowings that the company availed of during the year.  Thus, the interest expense of 2005 almost doubled in 2006.  After all, the new loans – classified in the company books as current liabilities - acquired during 2006 amounted to almost $4.5 billion.

The total asset turnover in 2006 is lower than those in 2004 and 2005 due to the acquisition of land and the construction of company buildings during the year. The additional costs of land and building amounted to almost $2 billion.

Based on all the foregoing, it is recommended that the money for investment be used to purchase shares of Abbott Laboratories.  Purchase of ABT shares is seen as a conservative move that will bring in more yield as compared to less riskier investment vehicles of investment such as time deposits and treasury bills.  The ways to reap returns through investing in ABT is by collecting regular dividends, and then to make money as well in the trading of stocks in the stock market.

REFERENCES:

2006 Fact Book of Abbott Laboratories

Company website of Abbott Laboratories (www.abbott.com)

2006 Annual Report of Abbott Laboratories

Value Line Publication, Inc. on Abbott Laboratories dated August 31, 2007

Website of Bloomberg (www.bloomberg.com)

Reilly, F. and K. Brown. Investment Analysis and Portfolio Management. Orlando, Florida:  The Dryden Press, 1997.