Abbott Shows Earnings Strength

Abbott Laboratories (ABT) again beat both consensus of $0.77 and our EPS estimate of $0.76 for the third quarter with EPS of $0.79. We continue to rate shares of Abbott Labs a Buy on the belief that earnings will grow at a CAGR [compound annual growth rate] of almost 12% over the next five years. Strong sales are driven by leading product Humira, an anti-inflammatory for rheumatoid arthritis and psoriasis.

Abbott offers potentially the strongest combination of growth and relative risk in all of the large-cap pharma space. Several new drug applications have recently been filed with the FDA which should accelerate sales in the pharmaceutical business. Based on our model, the company is expected to deliver double-digit EPS growth through the end of 2012. We believe Abbott possesses a low risk profile and will continue to trade at an industry premium.

Abbott currently trades at 16.2x our 2008 EPS estimate of $3.34. While considerably more expensive than the peer average of 11.1x, we believe the premium is warranted. Based on Abbott’s strong line-up of current products along with its formidable pipeline, we believe there is further room for the multiple to expand. We recommend investors purchase the name for a long-term hold within the pharmaceutical / medical sector. Our price target is $65, or 19.5x 2008 EPS estimate of $3.34.

Jason Napodano, CFA, contributed to the report.

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