Abbott has ‘levers to pull’ in its medical businesses, analyst says

RBC Capital Analyst Shagun Singh Chadha joins Yahoo Finance Live to discuss Abbott earnings and growth in its business segments including COVID testing, baby formula, and nutrition.

Video Transcript

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AKIKO FUJITA: Well, shares of Abbott are slumping after reporting third quarter results this morning. The company lifted its guidance, but reported a drop in sales because of the baby formula shortage. A decline in COVID-19 testing also weighed on the quarter. Abbott's earnings call with investors just wrapping up. For more on that, let's bring in Anjalee Khemlani, who's been tracking those comments for us this morning. Anjalee.

ANJALEE KHEMLANI: Absolutely, Akiko, on that point of the baby formula really weighing on their nutrition line of business, down 10%. And then the COVID testing still pretty, a decent demand, even though a reduction from the last quarter. The company noting that there are many global trends that are weighing, including COVID, including inflation, strong dollar. But all in all, they seem to be remaining optimistic about specifically the baby formula shortage and that sort of getting over as they reopened the plant last quarter. So that's where things stand right now.

AKIKO FUJITA: OK, let's take a deeper dive into Abbott's numbers here with Shagun Singh. She's Medical Devices analyst at RBC Capital Markets joining us today. Shagun, looking at where the stock is trading right now, certainly down despite some of those results, I'm imagining you've got an outperform with a price target of $132 a share. So you certainly feel like there's more upside. What do you think investors are getting wrong?

SHAGUN SINGH: Thank you so much firstly for having us here. We do like the stock. We think the company does have a pretty solid long-term financial profile of growth in the high single digits on the top line, and double digit EPS growth on the bottom line. If we just look at the Q3 numbers, the quarter was actually pretty strong. They did beat by $700 million on the top line, and about $0.20 on EPS. COVID-19 testing was definitely what drove the results. Results came in at about $1.7 billion. Consensus was looking at about $540 million in sales. So really impressive, despite the summer months.

And if you look at full year guidance at this point, it's $7.8 billion in COVID-19 sales, which is actually ahead of what they did last year. So pretty solid revenues in terms of COVID-19. I think what the sticking point here really is, is the mid-single to high single digit underlying growth. So there were factors that impacted the quarter such as COVID.

If you back out COVID-19 testing and infant formula recall, there was also medical device supply issues that impacted the company. So if you back out all those one-time items on an underlying basis, the company delivered about mid-single to high-single digit underlying growth, which is slightly below their longer term outlook of high single digits.

But I think it's more of a reflection of Q3, which is seasonally a weaker quarter. And then the COVID-19 environment, where the recovery is occurring. But it is at a much slower pace than what we would have liked in a normal environment.

ANJALEE KHEMLANI: Shagun, Anjalee here. I want to look at some of the very specific details that they let us know about today, one being the new plant for baby formula production. And then also looking at the Libre tests and looking at also models that are pretty different when it comes to direct to consumer and subscription models. I know there was mention of that. I wonder how you think this all plays for a company that's as large as it is, that has had quite a diverse market so far.

SHAGUN SINGH: Yeah, I think both on infant formula recall, I think it's a good step that they are planning to, they have made some leadership changes at the Michigan facility, and they are planning to move forward with plans about half a billion dollars in investments in a new US nutrition facility for specialty and metabolic infant formulas.

I think there is upside on diabetes as well. And honestly, if you just take a step back and look at the company, I do like the diversified portfolio that the company has. They are continuing to move forward within medical devices. Again, nutrition business, I think they lost about 20 share points given the recall. They gained half of it back as of September. And the impact I think this year is about $750 million. But I think this business should recover into next year.

Also in terms of diabetes, there is a CMS proposed coverage guidelines for CGMs, the comment period of that is open till about the 19th of November. And if expanded and coverage is approved, it could really bring more eligible patients into the population. Four million going to about eight million, which is another $2 billion US opportunity. So I do like their diversified portfolio. And I think they do have levers to pull in terms of just diabetes, medical devices, diagnostics, and nutrition coming back.

AKIKO FUJITA: Let's elaborate on that a bit. As you pointed out, some of the sentiment that's sort of weighing on the stock today is about the decline we've seen in COVID testing. Yes, we're going into what is expected to be a period of more upticks in COVID cases. But the reality is, we're not going to be at the peak that we have in over the last few years.

You mentioned a long list of other levers within their portfolio. What do you think is going to be the biggest driver that gets you to that $132 a share price target?

SHAGUN SINGH: Yeah, and I just want to back up. I don't think it's so much about COVID testing. It's more about, like I mentioned, investors' focus on the underlying growth profile of the company when you back out COVID testing, the infant formula recall, which is about $230 million hit this quarter again, and then the medical supply, medical device supply issue that they faced internationally.

So I think the sticking point for investors right now is really recovery. Just in terms of COVID, I think in an endemic phase as a base case, the company is looking for about $500 million in quarterly sales. I think that's a good placeholder, even for next year, which does provide some upside.

So I think again, the mid to high single digit growth profile versus the high single digit organic revenue growth that they aspire to get to on a long-term basis, I think the variance between that is really, I think Q3 being seasonally weaker and then the COVID-19 environment where the recovery is occurring, but it is not, we are not in normal times. So I think that's having an impact.

So I think that's more of a sticking point than COVID-19 testing. And again, just to mention again, they are doing about $7.8 billion for the full year. That's their guidance at this point was the $7.7 billion that they did last year. Q4 includes about $500 million in quarterly sales for COVID-19 testing business. And again, that does not include any additional COVID surges or government contracts.

AKIKO FUJITA: Shagun Singh, Medical Devices Analyst at RBC Capital Markets, appreciate your time today. And our thanks to Anjalee Khemlani, as well.