Yahoo Finance Abbott Laboratories Stock Shows Every Sign Of Being Modestly Overvalued
- By GF Value
The stock of Abbott Laboratories (NYSE:ABT, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $118.05 per share and the market cap of $209.1 billion, Abbott Laboratories stock gives every indication of being modestly overvalued. GF Value for Abbott Laboratories is shown in the chart below.
Because Abbott Laboratories is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.4% over the past three years and is estimated to grow 8.92% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Abbott Laboratories has a cash-to-debt ratio of 0.36, which ranks worse than 84% of the companies in the industry of Medical Devices & Instruments. Based on this, GuruFocus ranks Abbott Laboratories's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Abbott Laboratories over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Abbott Laboratories has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $37.3 billion and earnings of $3.19 a share. Its operating margin is 17.97%, which ranks better than 79% of the companies in the industry of Medical Devices & Instruments. Overall, the profitability of Abbott Laboratories is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Abbott Laboratories over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Abbott Laboratories's 3-year average revenue growth rate is in the middle range of the companies in the industry of Medical Devices & Instruments. Abbott Laboratories's 3-year average EBITDA growth rate is 12%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Abbott Laboratories's return on invested capital is 11.12, and its cost of capital is 4.93. The historical ROIC vs WACC comparison of Abbott Laboratories is shown below:
In summary, Abbott Laboratories (NYSE:ABT, 30-year Financials) stock shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Medical Devices & Instruments. To learn more about Abbott Laboratories stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
