At current levels, Abbott Laboratories (NYSE:ABT) is not that cheap but ABT stock should do reasonably well over the next year. For example, the shares trade for about 31.4 times this year’s earnings and 25 times 2021 earnings, according to Yahoo! Finance data.
This is a good deal more expensive than other drug stocks like Pfizer (NYSE:PFE) and Bristol-Myers Squibb (NYSE:BMY). Pfizer trades for just 11 times 2021 forward earnings projections.
And Bristol-Myers Squibb is at just 8x forward earnings. In fact, I recently wrote an article showing how BMY stock is cheap.
But according to its own history ABT stock is still very cheap.
ABT Stock Cheap By Historical Standards
Morningstar has a history of ABT’s price-to-earnings ratios. It shows that the average was 69 times in the past five years. You can see this in the table on the right.
Click to Enlarge
But without a certain high outlier year, the average is actually just 46.1x earnings.
This is still a good deal higher than the projections above of 31 times 2020 earnings and 25 times 2021.
The bottom line is that if ABT stock were to rise to its historical P/E ratio, it could rise another 84%. That is because the historical 46.1 P/E divided by its 2021 P/E ratio of 25 is an 84% premium.
Impact of Covid-19 Tests
Maybe ABT stock is worth more according to some analysts since it is responsible for producing fast-response Covid-19 tests for hospitals. Abbott announced on Sept. 16 that the FDA had granted emergency use authorization for its 15-minute Covid-19 test.
The test is called BinaxNow COVID-19 Ag Card rapid test and does not require any equipment to process samples or read the test results. It tests for antigens that detect certain proteins that are part of the Covid-19 virus.
Reuters said that the test will cost just $5.00 per unit. The kit is the size of a credit card and the nose swab is less invasive than traditional swab tests.
Moreover, Abbott Labs has an app to allow people to show their results. This will allow them to show venues and large gatherings that they are Covid-19 free.
This is going to be quite popular and should bring significant revenue to Abbott Labs. The company plans on being able to ship 50 million of these tests a month starting in October.
Abbott Labs has also received five other authorizations for Covid-19 tests. One of them is called ID Now that can also deliver results in minutes. It is used at the White House to screen visitors.
Barron’s wrote that the U.S. government has already signed a contract for $760 million for the first 150 million of the tests. The publication reported that the U.S. has bought up all the run of the test through the end of 2020.
Huge Income Contribution
The government said on Sept. 1 that it expects to distribute “the overwhelming majority” of the Abbott Labs tests to states. They can use them to open schools and give to first responders.
The $3 billion in revenue that these tests will bring in will account for 6.57% of the $45.6 billion of the company’s 2021 forecast revenue. However, they are likely very profitable for the company. I estimate they will account for a huge portion of the $3 billion in net income the company made in the last 12 months to June.
In other words, if the Abbott Labs 15-minute Covid-19 test becomes the standard for the country, watch out. The company’s earnings could skyrocket.
So far the company has not said how much the test costs to produce, but the intellectual property portion of the cost is likely not much. And with higher production, the economies of scale reduce the per-test cost.
So, even though the ABT stock is not cheap, it appears to be so on both a historical P/E and forward-looking basis.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
