Abbott’s quarter disappoints again: We’re downgrading it and considering what to do next
Shares of Abbott Laboratories fell 3% on Wednesday after the diversified health-care company delivered another less-than-stellar quarter. Revenue in the third quarter ended Sept. 30 rose 6.9% to $11.37 billion, missing the $11.4 billion consensus estimate compiled by market data provider LSEG. Organic sales , excluding Covid testing results, rose 7.5%, beating the 5.9% estimate, according to FactSet. Adjusted earnings per share (EPS) increased 7.4% to $1.30, matching expectations, LSEG data showed. Bottom line Abbott’s Q3 numbers were not the best, with sales in three of its four main operating segments coming up short. It was the second suboptimal quarter in a row. With shares less than 10% off all-time highs, we’re debating if it’s time to ring the register and exit Abbott to free up a space in the portfolio for a new name. During the Club’s Morning Meeting on Wednesday, Jim Cramer expressed concern about Abbott and fellow Club name Danaher’s exposure to China’s sluggish health-care sector. We are debating whether holding both names makes sense, since we would benefit from any improvement in China via our larger position in Danaher. ABT YTD mountain Abbott Laboratories YTD Additionally, Danaher, which has been really struggling this year, is showing signs of improvement. While down more than 25% from 52-week highs and nearly 30% from all-time highs reached back in 2021, Danaher may well represent the better risk/reward setup. We’re kicking this around internally and will, of course, update members as our thinking evolves. Regarding ongoing litigation over Abbott’s specialized formula for premature infants, management did not offer up much, except to say that they continue to stand behind their product, and the legal process is still ongoing. The formula in question is given to premature infants in neonatal intensive care units. It’s often among the only ways to feed these babies. The lawsuits allege Abbott did not properly warn caregivers about the risks of necrotizing enterocolitis, a severe intestinal disease. Abbott has repeatedly maintained that there is no scientific evidence that the product causes or contributes to causing NEC. Why we own it Abbott is a high-quality medtech company. The stock has dealt with multiple overhangs since we have owned it, such as litigation tied to its specialized infant formula; falling Covid test sales; and concerns about the impact of GLP-1 drug adoption on the company’s continuous glucose monitor business. It is worth noting that shares have been on the upswing year to date. Competitors : Dexcom , Boston Scientific and Edwards Lifesciences Most recent buy : May 29, 2024 Initiated : Jan. 29, 2024 Seeing no reason to buy more Abbott shares on Wednesday’s dip, along with the fact that the position is too small to warrant intense monitoring, we’re downgrading it to our 3 rating, which means we will be considering selling the stock into strength. We are also lowering our price target for Abbott to $140 per share from $145. There is only so much time in a day — so, as portfolio managers, we have to consider the value of our time. When it comes to a position with a sub-1% weighting and a second straight disappointment, we have to consider if the time spent doing the homework on Abbott isn’t better directed to monitoring, say a Nike , which we already have a greater than 2%-weighted position in and want to keep building as opportunities present themselves. Guidance Abbott management tightened their full-year EPS outlook around the $5.15 midpoint, now forecasting a range of $5.12 to $5.18 versus the previous $5.10 to $5.20 range. That was in line with the consensus estimate compiled by LSEG. The team continues to expect to realize full-year organic sales growth of 7.5% to 8%, excluding the company’s Covid testing business — or 6% to 7%, when including Covid testing. The full-year EPS guide minus the three quarters already reported implies that management is targeting adjusted EPS in the $1.47 to $1.53 range for the current fourth quarter. The midpoint of $1.50 was a penny ahead of what analysts were looking for, according to LSEG. Segment commentary Medical Devices sales in the third quarter were the lone standout, growing 12.5% versus the year-ago period on an organic basis. Driving the result was double-digit growth in diabetes care, electrophysiology, rhythm management, heart failure, and structural heart. Within diabetes care, specifically, sales benefited from 17.2% organic growth in continuous glucose monitors to $2 billion. Established Pharmaceutical sales were a hair short of expectations, though still managed to increase 7.1% organically versus the year-ago period. Emerging countries that represent the most attractive long-term growth opportunities for Abbott’s branded generics again exceeded $1 billion in sales, growing 11.1% organic year over year. On the call, Abbott CEO Robert Ford highlighted strength in gastroenterology, cardiometabolic, and pain management, citing “favorable demographic trends and growing demand for high-quality, affordable medicines.” Diagnostics sales were a drag, missing estimates, and falling 7.8% organically, reflecting a nearly 28% organic decline in rapid diagnostics. Quarterly sales were up only 0.4% when excluding the impact of Covid tests. Covid testing sales were only $69 million in the quarter, down from the $265 million in the year-ago period. Global core laboratory diagnostics sales managed to grow 2.2% organically year over year, and when excluding China, the core laboratory diagnostics business was up 7% organically, “with markets such as the U.S. showing an acceleration in growth in the third quarter compared to growth in the first half of the year,” noted Ford. China remains a headwind due to challenging market conditions, including volume-based procurement programs designed to lower health costs there. Within the point of care diagnostics segment, which was up nearly 8% organic, management called out the growing adoption of two first-of-a-kind tests: the point of care concussion test and the high-sensitivity troponin test used for earlier and more accurate heart attack detection. Nutrition sales — home to brands such as Ensure protein powder and PediaSure drinks for kids — also missed expectations. It did manage to grow 4% year over year, organically. Adult sales drove growth, increasing 5.4% organically, led by Ensure and Glucerna diabetes shakes. On the call, Ford said the adult segment was led by 10% growth in international markets. (Jim Cramer’s Charitable Trust is long ABT, NKE. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.