Abbott Laboratories Is What A Vee-Shaped Recovery Looks Like

Thursday, April 16, 2020 | Thomas Hughes
Sometimes I Surprise Even Myself

A few weeks ago I wrote an article about Abbott Laboratories (ABT) titled Abbott Laboratories Correction Is Over Now The Bull Market Can Continue. In it, I cited secular trends like the growing world population, the aging population, and the growing demand for elective procedures as drivers of long-term growth. I also cited its long history of dividend increases and the expectation of future increases as reasons why investors would want to own this stock. And I was right.

At the time, Abbott was staging a pretty significant recovery. Since then, the stock has continued to move higher completing a very nice looking vee-shaped recovery. Today, the company reported earnings and has the stock sitting at a new all-time high, up 18% in just the last two weeks, and more gains could be on the way. The question now is, is it too late to buy Abbott or is there still value in this cash-flow king?

Abbott Laboratories Is What A Vee-Shaped Recovery Looks Like

Great News But …

Abbot reported Q1 earnings today and outperformed consensus by a wide margin. The analysts had been expecting revenue to decline slightly on a year over year basis but that didn’t happen. The company exceeded the consensus by 3.5%, posting a 2.5% increase in YOY revenue, on strength in most segments. The only weakness was in the diagnostics operating segment, down -0.8%, but there are mitigating factors.

For one, the negative impact of foreign exchange is more than enough to offset the loss. Organic sales for the segment were positive but foreign exchange cut into the bottom line results. For another, demand for COVID-19 testing is likely to offset that weakness as soon as the current quarter. The company has launched three critical new tests for COVID-19 that are already on the market.

  • the Abbott ID NOW COVID-19 molecular test, the fastest available molecular point-of-care test delivering results within 13 minutes and positive results in as little as five minutes
  • the Abbott RealTime SARS-CoV-2 molecular test, which runs on Abbott's m2000 RealTime System located in hospitals and reference laboratories,
  • a serology blood test for the detection of the antibody, IgG, on its lab-based immunoassay testing platforms, used to detect people who have already had the disease.

The but in this story is Abbott, like competitor Johnson & Johnson, has suspended its guidance for the year. The company reported a downtick in procedures, specifically heart-related surgeries, in the report and that trend is expected to worsen in the second quarter. The silver lining is that demand is expected to be high once the pandemic passes.

Ok, But What About The Dividend

One of Abbott’s many strengths is its status as a Dividend Aristocrat. The company has been increasing its distribution, adjusted for the AbbVie spinoff, for over 30 years and that trend is not expected to end. The company specifically calls attention to this status in the earnings release and is well-capitalized to boot. Abbott will survive the pandemic and emerge stronger than before.

Along with its expectation for growth, Abbott has a strong balance sheet and ample cash on hand. Total cash and cash-equivalents are more than $3.7 billion and backed up by another $5 billion in credit facilities. This company will keep paying its dividend and raising its distribution again later this year, just like always. This is important to us now because Aristocrat status and expectation of dividend increase are powerful drivers of future share price increases.

The Technical Outlook: Bullish And Breaking Out

The only way to describe the Abbott chart is to call it very bullish. The stock has been in a strong uptrend since 2017 and, despite the recent correction, that trend is not over. Now the Vee-shaped recovery is complete the stock is breaking out to new highs and that means a new bull market is forming.

Based on the depth of the correction we might expect to see price action move above the previous all-time high by $30 or more. Based on the past three years of rallying, the pandemic-inspired correction, and today’s break to new highs it is possible this stock could move up by $60 or 66% over the next 18 to 36 months.

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