We will initiate a position in Abbott Labs (ABT) after you receive this Alert, purchasing 500 shares at around $46.51. We will also be adding to our iShares MSCI Eurozone ETF (EZU) position, buying 300 shares at around $41.63. Following the trades, ABT and EZU will represent roughly 0.83% and 1.19% of the portfolio, respectively.
We are bringing ABT out of the bullpen and into the portfolio as our sale of HP Enterprise (HPE) has made room for this additional name. You can read our initial bullpen Alert on the company here. The company's 2016 annual report can be found at this site.
Our bullish thesis on ABT is mainly predicated on:
- The company's ability to integrate high-growth medical-device businesses from Jude Medical (STJ) (which will also provide significant cost synergies, leading to margin improvement over time) -- we note that the company saw solid performance from the integration in its most recent quarter, helping ABT to exceed Street expectations
- Further margin improvement from the acquisition of Alere (ALR) -- the merger terms were recently updated to be more favorable for ABT, and while there is some uncertainty around the timing of the close, the ultimate addition of Alere should be accretive. As a result of the uncertainty, this contribution is likely not embedded in the current multiple for shares.
- A robust product pipeline, which is only further bolstered by acquisitions (St. Jude and Alere).
- Consistent, growing dividend yield -- the company has increased its payout for 45 consecutive years. The yield sits at around 2.3%.
- Easing comps throughout this year (more of a short-term driver) -- the company is lapping issues in Venezuela in the upcoming quarter and will also face easier compares for China Nutrition in the third quarter (this has been one of the troubled businesses of late).
- Abating pressures from a strong dollar -- nearly 70% of the company's sales come from outside the United States.
- Positive leverage to long-term growth in emerging markets.
We are starting relatively small in ABT as we, of course, want to leave room to scale into the position over time. While we believe the stock has significant room for upside, we also recognize that the integration process for both major acquisitions comes with increased uncertainty (one of the major reasons the multiple on shares remains depressed at around 17x-18x next year's earnings). We believe the consistent dividend pays shareholders to wait while the integration process plays out and the prospect for revenue growth (robust product pipeline) offers some protection from any integration issues.
We are initiating the position with a $53 price target, which reflects roughly 19x 2018 consensus EPS estimates. That being said, we believe there is more room for upside here, both on further multiple expansion and also on earnings growth should management prove they can execute ongoing integrations and if certain end-market pressures (e.g., China Nutrition) can turn around faster than expected.
As for EZU, we want to put the remaining funds from the HPE sale to work in this ETF, which we have waited to add to in the hopes that the fund would drop below our cost basis. We want to take advantage of the down day today so that we do not miss an opportunity to bulk up our stake. We continue to see growth in the broader European region and we believe the euro has more room to strengthen versus the dollar.