Abbott Labs' Weakness in Devices Hurts Long-Term Growth Potential

NEW YORK (TheStreet) -- By conventional valuation methods, shares of Abbott Laboratories (ABT) aren't expensive. In fact, it's easy to argue that Abbott is one of the best bargains in medical technology.

At around $43 per share, up nearly 12% for the year to date, the stock is trading at a price-to-earnings ratio of 27, one point below the industry average P/E of 28, according to Yahoo! Finance. On a forward-looking basis, these shares are trading under three times 2015 revenue estimates of $23.6 billion. Likewise, that's below the industry average price-to-sales ratio of 3.51.

That, however, is part of the problem. Abbott's growth projections are too low. With the stock trading just 1.19% away from its 52-week high, these shares just might have reached their ceiling for the next couple of quarters.

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All told, Abbott, as cheap as the stock may appear, doesn't offer the sort value one would expect from a large medtech player -- unless management figures out a way to revive the company's stagnant devices business.

Like Stryker (SYK) , Abbott should consider a deal to secure long-term growth and remain relevant in the fast-pace world of medical device technology. Management can't sit idle and expect to keep up with Covidien (COV) and Medtronic (MDT) .

That's easier said than done, especially with the company lacking in exceptional free cash flow margins. The company's recent deal with Mylan (MYL) , which gives its Established Pharmaceuticals business much-needed exposure in emerging markets, is a step in the right direction. But it's not enough. Not when Abbott's nutrition business, its largest segment, is growing at just 3% annually.

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