Abbott Laboratories (ABT): Buy, Sell, or Hold Post Q3 Earnings?

Over the past six months, Abbott Laboratories’s shares (currently trading at $125.45) have posted a disappointing 7.9% loss, well below the S&P 500’s 11.2% gain. This may have investors wondering how to approach the situation.

Given the weaker price action, is now a good time to buy ABT? Find out in our full research report, it’s free for active Edge members.

Why Does ABT Stock Spark Debate?

With roots dating back to 1888 when founder Dr. Wallace Abbott began producing precise, dosage-form medications, Abbott Laboratories (NYSE:ABT) develops and sells a diverse range of healthcare products including medical devices, diagnostics, nutrition products, and branded generic pharmaceuticals.

Two Things to Like:

1. Economies of Scale Give It Negotiating Leverage with Suppliers

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $43.84 billion in revenue over the past 12 months, Abbott Laboratories boasts impressive economies of scale. It may not be as large as heavyweights such as UnitedHealth Group and The Cigna Group from a topline perspective, but its heft is still an important advantage in a healthcare industry that is heavily regulated, complex, and resource-intensive.

2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Abbott Laboratories has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 16.8% over the last five years, quite impressive for a healthcare business.

One Reason to be Careful:

Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Abbott Laboratories’s sales grew at a mediocre 6.4% compounded annual growth rate over the last five years. This wasn’t a great result compared to the rest of the healthcare sector, but there are still things to like about Abbott Laboratories.

Final Judgment

Abbott Laboratories’s merits more than compensate for its flaws. With the recent decline, the stock trades at 22.7× forward P/E (or $125.45 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free for active Edge members.

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