Why Abbott Is A Core Portfolio Holding

Abbot (ABT) - 01/03/2020
Stock Price: $85.89
Market Cap: $153B
Forward P/E: 23.86
Dividend Yield: 1.68%
TSC Core Equity Portfolio Weight: 3%
Price Target: $100 - $102 (+15% - +17% upside potential)

Fundamentals
  • I have little faith in developed nations ability to limit, let alone reduce the obesity crisis. After visiting SF Bay Area for the holidays, I couldn't help but notice the gluttony at the local taqueria, See's Candies, and In-N-Out, myself included (granted, it was holiday season cheat week). I think people are going to keep getting fatter and the rise of plant based meats ($BYND), fancy exercise machines ($PTON) and coolsculpting fat zapper machines ($AGN, $CUTR) won't be enough to stem the tide.
  • Enter Abbott's number one no-prick diabetes management system: Freestyle Libre. The smartphone enabled Libre has first mover advantage, is a sticky product ecosystem, and generates recurring revenue. A serious Trifecta of a product. The secular trends lifting up Abbott are here to stay, and they're doing just fine fending off the competition from companies like Tandem's DexCom.
  • Optionality exists in shares of Abbot, thanks to their cardiovascular unit, especially in the mitral valve space. Abbott is in a race with Edward LifeSciences, Boston Scientific, and Medtronic to develop a mitral valve for the heart. The expected market size of mitral valves is expected to eclipse the massive multi-billion dollar aortic valve market. Any success with their Tendyne mitral valve trials could down the road lead to a new product with a sizable TAM and strong secular trends (baby boomers retiring). Abbot has already struck success in the mitral structure space with MitraClip, which posted Q3 '19 revenue of $176M (+30% yoy) and recently received expanded approval from the FDA.
  • Solid cash flows, clean balance sheet, a long history of annual dividend growth, and a strong management team that is taking advantage of significant secular trends make Abbott a strong candidate for anyone's health care exposure. 
Technicals
  • Shares of Abbott have been trading within a well defined 35+ year old rising channel, and are pushing towards its $100 price target, derived from the 423.6% fibonacci extension level of the high in 2015 and the low printed in 2016.  (chart 1)
  • Looking at the shorter term chart, shares of Abbot have been forming an ascending triangle pattern and are beginning to push up against the horizontal resistance. Ascending triangles are a high probability technical pattern that produce measured move price targets. In this case, the price target derived from the ascending triangle is $102, which coincides with the longer term fibonacci price target outlined above. The $102 price target will trigger if Abbott shares decisively break above $88 (chart 2)




Risks
  • Abbott has a good chunk of emerging market exposure through its generic drug business, and more so its nutritional supplement business. The volatility, unpredictability, and regulatory uncertainty of emerging market countries could materially impact Abbott's EM division. 
  • Abbott's molecular diagnostics division faces strong competition from names like Roche , Hologic, and Qiagen, and new alternative therapies like drug-eluting stents could put a dent in Abbott's PCI business.
  • A failure in clinical trials for its Tendyne Mitral Vale could cause selling pressure in the stock.

Comments

Popular Posts