Initiation of Research Coverage: Abbott Laboratories

Thursday, December 20, 2012

William Blair & Company initiated research coverage of Abbott Laboratories (ABT $65.93), a highly diversified provider of medical devices, nutritionals, and pharmaceutical products, with an Outperform rating and Established Growth company profile.

Abbott’s spin-off of the company’s proprietary pharmaceuticals business, to be renamed AbbVie, is expected to close on January 1, 2013. Analysts Ben Andrew and Brian Weinstein estimated the remaining “new” Abbott Laboratories (consisting of medical devices, diagnostics, nutritionals, and established pharmaceuticals) will generate earnings per share of $2.00 in 2013 and $2.25 in 2014.

“Following the spin-off, ‘new’ Abbott will have several features that will differentiate the company from its large-cap healthcare peer group,” Andrew said. “First, 40% of the company’s revenues will be derived from emerging markets, versus 10%-20% for its competitors. Many of these geographies are growing in the low- to mid-double-digit range, which should support growth. Second, in developed geographies, several of the company’s largest product lines should grow in the midsingle digits as new product launches expand mature (pediatric nutritionals and vascular care) and growing markets (adult nutritionals and diagnostics). Third, we believe the company has room to expand its operating margin by 200 to 400 basis points by 2015. The combination of these drivers should result in mid- to high-single-digit top-line and low-double-digit bottom-line growth over the next three years, 300 to 500 basis points above many of its peers.”

Weinstein said, “Abbott’s when-issued shares are already trading at a premium multiple, which we believe is justified. Given the company’s unique position to drive top- and bottom-line growth, we see potential for upside to our estimates over time. We believe the company has additional opportunities for the stock to go up over the next several years, including delivering on guidance and finding uses for its strong cash flows (acquisitions, dividends, or share repurchases).”

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Current Ratings Distribution (as of 11/30/12)

Coverage Universe
Outperform (Buy): 61%
Market Perform (Hold): 34%
Underperform (Sell): 1%

Inv. Banking Relationships*
Outperform (Buy): 9%
Market Perform (Hold): 2%
Underperform (Sell): 0%

* Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months.

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