Investors in large multinational companies that have focused on international expansion have been forced to make tough decisions given that a strong U.S. dollar has devalued sales in overseas markets.
However, while emerging markets have been and still remain a key growth strategy for Abbott Laboratories (NYSE:ABT), shareholders don’t have to worry too much about the impacts of the strong dollar.
Moreover, the first-quarter earnings that ABT delivered Wednesday suggest betting against ABT stock is not a wise move.
Abbott’s diverse geographic mix is well balanced, with 70% of sales coming outside the United States, surpassing competitors like Johnson & Johnson (NYSE:JNJ). All told, among the large-cap healthcare companies, Abbott Laboratories has one of the largest shares of the emerging markets, on a revenue basis, generating roughly 50% of its revenue from fast-growing geographic regions.
Expect this to be a boon for the competitive position of Abbott Laboratories, making ABT stock a solid way to play people living longer around the world.
The Quarter That Was
Abbott Laboratories on Wednesday reported first-quarter profit of $2.29 billion, or $1.51 per share. On an adjusted basis, the Abbott Park, Illinois-based company said it earned 47 cents per share, exceeding Wall Street expectations. The average estimate surveyed by Thomson Reuters called for earnings of 42 cents per share.
Abbott Laboratories, which makes infant formula, medical devices and drugs, posted revenue of $4.9 billion — also surpassing Street forecasts of $4.86 billion.
But here’s the thing: Not only do worldwide sales of $4.9 billion mark a 10% year-over-year increase, but they include double-digit growth in emerging markets. And this demonstrates how Abbott Labs continues to grow in key strategic areas.
This is important because as growth in established regions like the U.S. and Europe continues to slow, Abbott can leverage the overseas distribution network it has established to offset any decline. Not to mention, it reinforces the importance of the investments Abbott has made in emerging markets. And this bodes well for ABT stock.
Moreover, that Abbott Laboratories maintained its prior full-year 2015 business outlook, calling for adjusted earnings earnings of $2.10 to $2.20 per share, suggests that concerns about currency fluctuations may be overstated. And this supports the bullishness earlier in the year by Bank of America/Merrill Lynch analysts.
Emerging Markets Growth Key for ABT Stock
In January, while upgrading ABT stock to “buy” from “neutral,” the analysts described Abbott as “naturally hedged” in overseas markets like in Europe. The firm, which also boosted its price target on Abbott stock from $50 to $52, noted that Abbott has “‘significantly less’ exposure to government payers, ‘significantly more’ exposure to faster growing emerging markets.”
Last month, at the Cowen & Company 35th Annual Health Care conference, Abbott said it expects the emerging markets to grow more than twice the rate of developed markets in the next five years. And given that healthcare spend in emerging markets is still very low as a percentage of gross domestic product, Abbott sees that as a strong growth opportunity.
What’s more, that Abbott in February completed the sale of its developed markets branded generics pharmaceuticals business to Mylan N.V. (NASDAQ:MYL), means its Established Pharmaceuticals business can become more focused entirely on emerging markets.
In other words, not only is growth in emerging markets still a sound strategy for Abbott, but the company can achieve this with relatively minimal pressure on its revenue and profits.
Given the solid earnings results by Abbott on Wednesday and the company’s full-year outlook, the analysts were right — but now, they might be forced to upgrade their earnings growth projections of 9.6%, as well as their price targets.
Bottom Line
Emerging-market expansion and an aging population are good business for Abbott Laboratories. What’s good for the company is also good for ABT stock. That the stock has a consensus buy rating and has an average analyst 12-month price target of $50.50, implying 10% gains from current levels, suggests the market likes the company’s plan.
In my view, however, ABT stock can reach a fair value of around $60 in the next 12 to 18 months, netting almost 30% in ABT stock. And its emerging market strategy should fuel those gains.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
