So Abbott's devices struggle, while disappointing in its own right, doesn't necessarily reflect poor execution as much as it appears to be a marketplace trend. Plus, given that the company is now only one quarter removed from the AbbVie spin-off, management deserves more time to get this situation corrected. It didn't impact profitability much because Abbott was able to beat consensus EPS estimates, which also arrived 2 cents higher year over year -- excluding AbbVie.
Diversification Still an IssueAside from the weakness in the devices business, Abbott no longer appears as diversified as it should following the AbbVie spin-off. It's certainly impressive that the nutritional business is performing so well, growing at 9% both on a reported and operational basis. However, this means that nutrition now accounts for almost 32% of Abbott's total revenue.
The nutrition business can be expected to keep performing well, but this is where better diversification or an improved devices business would alleviate concerns. Investors are encouraged to show some patience here; another quarter or two of underperformance in devices should raise the threat level.
Management, however, seems confident about Abbott's future prospects -- guiding full-year earnings per share to between $1.98 to $2.04, up from $1.74 last year, with second-quarter EPS expected to be between 43 cents and 45 cents -- in line with Street estimates on mid-single-digit revenue growth.
Bottom LineThere are several areas that Abbott's management need to address. However, the stock, which is trading at a P/E of 11, or half that of J&J's, presumes that these obstacles are too much to overcome. Although the stock appears cheap on these metrics, shares are not as attractive based on fiscal 2014 estimates, which pushes the P/E closer to 16. I'm confident that management will execute in the right direction, but logic would suggest that investors stay away until there's more evidence they have things under control. At the time of publication, the author had no position in any of the stocks mentioned. Follow @saintssense
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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