Abbott stock (NYSE: ABT) currently trades at $106 per share, over 10% below its level in March 2021, and it has the potential for sizable gains. Abbott saw its stock trading at around $109 in late June 2022, just before the Fed started increasing rates, and is marginally below that level. The stock has gained 10% since September 2022 compared to the S&P 500, which gained about 23% during this period. The rise in ABT stock over the recent past can be attributed to an expected uptick in total procedures volume, aiding its medical devices business. Recently, UnitedHealth’s management stated that their medical costs may be high in the near term as more elective procedures are being performed. Still, ABT stock has underperformed in the broader markets in recent months. This can be attributed to rising concerns about a potential recession and its impact on Abbott’s businesses. The decline in Abbott’s revenues over recent quarters has also contributed to the stock’s underperformance. The U.S. FTC is also investigating Abbott along with a few other companies that make baby formula for collusion to win state contracts.
Returning to the pre-inflation shock level of $141 means that ABT stock will have to gain 33% from here. However, we do not believe that will materialize any time soon and estimate Abbott’s valuation to be around $122 per share, implying about 15% gains. This is because of a decline in sales and earnings in the near term after a pickup in the diagnostics business during the pandemic. Abbott’s operating margin has contracted from 19.6% in 2021 to 16.8% now. Our Abbott Operating Income Comparison dashboard has more details. Still, from a valuation perspective, ABT stock appears to have room for growth from its current level of $106.
Our detailed analysis of Abbott’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
- April 2021: Inflation rates cross 4% and increase rapidly
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how ABT stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
ABT and S&P 500 Performance During 2007-08 Crisis
ABT stock rose from $26 in September 2007 to $28 in August 2008 (pre-crisis peak) before falling to around $22 in March 2009 (as the markets bottomed out), implying ABT stock lost nearly 20% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $26 in early 2010, rising 14% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
ABT Fundamentals Over Recent Years
ABT revenues rose from $31.9 billion in 2019 to $43.7 billion in 2022, as the Covid-19 outbreak resulted in very high demand for testing, driving the company’s diagnostics business. Revenues declined gradually over the recent quarters reaching $41.5 billion in the last twelve months amid falling demand for Covid-19 testing. Abbott’s reported earnings increased from $2.07 in 2019 to $3.94 in 2022 due to higher revenues and operating margin expansion. Looking forward, diagnostics revenues are expected to see a decline in the near term, while the company’s other businesses, including medical devices and established pharmaceuticals, will likely see steady growth.
Does Abbott Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
Abbott’s total debt decreased from $18 billion in 2019 to $17 billion in 2022, while its total cash increased from around $4 billion to $10 billion over the same period. The company garnered $10 billion in cash flows from operations in 2022. Given its solid cash position, Abbott appears to be in a comfortable position to meet its near-term obligations.
Conclusion
With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Abbott stock has the potential for solid gains once fears of a potential recession are allayed. That said, the fading demand for Covid-19 testing resulting in near-term revenue headwinds remains a risk factor to realizing these gains.
While ABT stock looks like it can see some gains, it is helpful to see how Abbott’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Proto Labs vs. Abbott.
With inflation rising and the Fed raising interest rates, among other factors, ABT stock has fallen 3% this year. Can it drop more? See how low Abbott stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
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