Abbott Needs a Growth Injection

NEW YORK (TheStreet) -- With shares of Abbott Laboratories (ABT) down by more than 15% since May, investors in the healthcare conglomerate are still trying to figure out whether management was correct in its decision earlier this year to separate the company's strong drug business into a new spinoff entity called AbbVie (ABBV).

While the decision to break up the company was initially met with excitement, the remaining portions of Abbott, which consists of (among others) the devices and nutrition businesses, have struggled with revenue growth. Consequently, since the stock reached a 52-week high of $38.77 per share in May, shares have not only lagged both Johnson & Johnson ( JNJ) and Medtronic ( MDT), but Abbott has also been outperformed by its spun-off arm AbbVie.

With the company due to report its third-quarter results on Wednesday, I believe the only way to justify buying this stock -- even on this recent pullback -- is for management to demonstrate not only better operating balance between the company's four remaining business segments, but for Abbott to show that it can compete more effectively against Johnson & Johnson in areas like medical devices.

Abbott investors will point out that the company has been performing well in both diagnostics and nutrition. Though this might be true, the stock has been sliding because the devices business, which is the company's largest segment, continues to underperform, including posting flat results in the July quarter. By contrast, Johnson & Johnson grew its devices business by 12%.

The other issue for Abbott is that, even when there's good news, it introduces some causes for concern. For instance, Abbott investors are correct to point out the meaningful improvements management has made in the nutrition business. But that has done little to advance margins, given that the company recently posted almost a 1% year-over-year decline.

I won't deny that management deserves credit for the improvements in the nutrition business, which posted 8% revenue growth in the July quarter. But the fact that nutrition now accounts for more than 30% of the company's overall revenue demonstrates a lack of balance and is an exploitable weakness in the company's overall business.

Management continues to invest in the nutrition business and recently revealed plans to achieve 20% operating margin in nutrition over the next two years. In that regard, it does appear as if Abbott's international expansion plans in emerging markets are beginning to work, including goals to grow the percentage of total revenue in emerging markets from 40% today to roughly 50% by 2015.

To the extent that management can execute these plans while also growing profit margins, I believe this stock still has meaningful upside potential. But these are some big "ifs." Johnson & Johnson, Medtronic and, say, Boston Scientific ( BSX) have expressed similar initiatives. I don't think they intend on ceding these growth opportunities without a fight.

On Wednesday, investors should tune in closely to the conference call to learn of these developments. Likewise, I believe Abbott can stabilize its stock and inject some confidence if management shores up the company's performance in its Established Pharmaceuticals business, or what the company calls "branded generics." If that that segment can show better than 2% growth, it would be an encouraging sign.

Listen, I like this company. I realize I've been a bit critical here. But it's because I see a lot of potential value that's not being realized. Some of which is due to weaknesses in execution where the likes of Johnson & Johnson have done moderately better.

I do see opportunities for Abbott to steal market share in devices and diagnostics. It may require a strategic acquisition, or possibly two, for Abbott to gain the sort of leverage it needs to execute its global ambitions. While this recent pullback does make the stock appear more attractive, absent better growth and diversification, I'm still not at the point where I'd want to risk my own money here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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