For the last few weeks, I believe that one of the biggest reasons investors, and the public at large have been so uncertain is simply because the scope of the spread of COVID-19 infection really is. Shelter-in-place orders in some cities and states followed stay-at-home and self-isolating policies that have taken place pretty much everywhere and affected the operation of every business and aspect of daily life. While those measures have certainly been necessary and appropriate – and will continue to be so – they’ve only increased the sense of uncertainty, and therefore of fear.
I’ve seen a lot of commentary, analysis and opinion about what it will take, not just for the financial markets, but also for the country at large to start to regain some sense, if not of normalcy, then at least of sanity. One of the first elements that I think needs to fall into place is being able to understand not only how COVID-19 behaves, but also just how widespread it is. The more data that can be gathered, the more accurate and reliable analysis, diagnosis, and therefore treatment becomes. That also means that the sooner the right kinds of measurement systems are put in place, the more quickly experts can provide better information to educate the public about what to expect, and what we can do to take ourselves and the people we love.
On an individualized level, a big piece of the puzzle is being able to answer the question of whether or not you are infected. Speed is usually a critical component of successful treatment of any illness, no matter what it is. That means that the quicker the turnaround between when you get tested to when a diagnosis can be made, the faster medical professionals can start taking correct steps to help you deal with the problem. Since coronavirus is being called a “novel” virus, there were little to no system in place to deal with the testing phase quickly. Results have generally taken a couple of days in most cases to come back for a virus that has proven to spread very quickly. That means that accelerating the testing phase not only aids treatment of infected patients, but also can make a big impact on limiting the spread from a single patient to a much larger group of individuals.
This week a significant piece of news came across the wires that the U.S. Drug and Administration (USDA) provided emergency authorization for Abbott Laboratories (ABT) for a rapid test that can used in physician’s offices and urgent-care clinics. The test makes it possible to get a positive result for the virus in as little as five minutes, and a negative result – meaning the patient is COVID-19-free – in about 13 minutes. ABT isn’t the only company in the Medical sector that is working on the problem, but they are one of the largest companies in the sector, which means that they have the means not only to develop the test, but also to distribute it quickly on a global basis. That puts them at the forefront, and on the front lines of the fight against the virus, but it’s hardly the only arrow in their quiver. This is a company with a wide range of innovative products spread across every one of its divisions. The stock has also rebounded impressively from the early-stage, broad-based volatility in February and March that saw the stock market drop to bear market levels, with a big move in just the last week of more than 13% to the upside. The stock remains about -17% off of its 52-week high, reached in January. Is the stock a good bargain, with market momentum on its side to boot? Let’s dive in.
Fundamental and Value Profile
Abbott Laboratories is engaged in the discovery, development, manufacture and sale of a range of healthcare products. The Company operates through four segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products and Vascular Products. Its Established Pharmaceutical Products include a range of branded generic pharmaceuticals manufactured around the world and marketed and sold outside the United States. Its Diagnostic Products include a range of diagnostic systems and tests. Its Nutritional Products include a range of pediatric and adult nutritional products. Its Company’s Vascular Products include a range of coronary, endovascular, vessel closure and structural heart devices for the treatment of vascular disease. The Company, through St. Jude Medical, Inc., also offers products, such as rhythm management products, electrophysiology products, heart failure related products, vascular products, structural heart products and neuromodulation products. ABT’s current market cap is $134.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings grew a little more than 17% while revenues improved about 7%. In the last last quarter, earnings growth was a little over 13%, with sales rising almost 3%. Increasing earnings faster than sales isn’t easy to do, and generally isn’t sustainable in the long-term, but it is also a positive mark of management’s ability to maximize its business operations. The company’s margin profile is also a sign of strength. In the last twelve months, Net Income was 11.55% of Revenues, while in the last quarter, it increased to 12.6%.
Free Cash Flow: ABT’s free cash flow is generally healthy, at $4.5 billion over the last twelve months. This number has declined from about $4.9 billion at the beginning of the 2019, and it translates to a modest Free Cash Flow Yield of 3.22%.
Debt to Equity: ABT has a debt/equity ratio of .53, which is a low number that implies the company takes a conservative approach to the use of leverage. While the company’s liquidity is generally healthy, it is also showing some signs of deterioration; in the last quarter cash and liquid assets were $4.14 billion versus $18.8 billion in long-term debt. While debt has been mostly stable, in the last couple of years cash has declined from more than $7.55 billion in mid-2018. It is worth noting ABT is investing heavily in rapid distribution of its COVID-19 test, which means that in the near-term, cash and liquid assets is unlikely to increase.
Dividend: ABT pays an annual dividend of $1.44 per share, which translates to a yield of about 1.82% at the stock’s current price. The dividend was about $1.28 a year ago, which should be noted; an increasing dividend is a strong indication of management’s forecast and confidence in its future.
Value Analysis: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $62 per share. That means the stock is overvalued right now, despite the fact that it remains well off of its January highs, by about -19% additional downside from its current price to its fair value target.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend since late January. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The drop was rapid, and more than -30% in size, which is dramatic no matter how you slice it. The rally back up has been nearly as volatile, with the stock pushing above the 61.8% retracement line in the last few days before sliding back a bit. Resistance is at that retracement line, which is sitting around $80.50 per share, with best support at the 38.2% retracement line around $73.50. A push above $80.50 should give the stock short-term momentum to rally to around $85 per share, while a drop below $73.50 could see it retest its multiyear low around $62.
Near-term Keys: There is a lot to like right now about ABT’s fundamentals, and the fact the company is right in the thick of the current struggle with COVID-19 means that it is relevant to everybody in the U.S. right now. Even so, the stock is significantly overvalued, which means that it just doesn’t offer a compelling, value-oriented reason to buy the stock with a long-term forecast. There could be some interesting opportunities to place short-term trades, depending on what shifts in momentum occur for the stock in the days, weeks, and months ahead. You could use a push above $80.50 as an interesting signal to think about buying the stock or working with call options, using $85 to $87 as potential bullish target points. A drop below $75.50 would act as a signal to consider shorting the stock or working with put options, with an eye on a range anywhere from $70 to $62 as an exit point on a bearish trade.