Cramer's Investing Club: We believe the market is wrong on core holding Abbott's future potential

Published Wed, Jan 26 202212:57 PM EST

Charitable trust stock Abbott Labs (ABT) reported fourth-quarter earnings before the opening bell on Wednesday. On the top line, sales of $11.5 billion (+7.7% YoY organic) exceeded the $10.64 billion consensus. On the bottom line, adjusted diluted earnings of $1.32 per share (-9.0% YoY) outpaced the $1.19 per share consensus. "2021 was an outstanding year for Abbott," commented CEO Robert Ford on the release. "We achieved more than 40 percent EPS growth, exceeding the baseline EPS guidance we set at the beginning of last year and, importantly, continued to advance our new product pipeline across the portfolio." Guidance Additionally, management issued first-quarter and full-year 2022 earnings guidance. For the first-quarter, management guided for adjusted diluted earnings of "at least" $1.50 per share, nicely ahead of the $1.11 per share consensus. As for the full year, management forecasts earnings of "at least" $4.70 per share (assumes a $2.5 billion contribution from Covid testing-related sales and represents nearly 50% growth versus a pre-pandemic 2019 baseline). That would short versus what the Street was looking for coming into the print (consensus is a bit mixed depending on where you look but we're seeing a range of $4.74 to $4.78 per share expected for FY2022). Abbott makes the BinaxNOW at-home Covid test. That said, looking at this guide in a vacuum does not tell the full story and we believe this guidance to not only be highly conservative but also much closer to expectations when factoring in comments made on the earnings call. For starters, management told us on the call that "forecasting Covid testing demand for more than a few months at a time has been challenging. Therefore, our initial forecast compromises sales that we expect to occur in the early part of the year. And we'll update this forecast one quarter at a time over the remainder of the year." Furthermore, Covid is not the only reason to believe management is being conservative: On the call, the team called out macroeconomic factors that aren't unique to Abbott including staffing shortages at the hospitals Abbott serves, the unwillingness of patients to go in for certain procedures as a result of Covid surges, and the supply chain and inflationary challenges that are all too well understood at this point. All of these dynamics as well as the strong underlying growth Abbott is seeing in its base business (think ex-Covid sales) went into that full-year guidance and give us confidence that management has plenty of room to raise that guide throughout the year. Abbott management after all is known to under promise and over deliver (UPOD). Lastly, and here is the kicker, once you dig into the conference call, you realize that management did actually hint at guidance being more in line with expectations than the initial release would have you think. The team called out that they didn't guide with their typical $0.10 range because of the uncertainty noted above and that they used the term "at least" because they didn't want to cap the upside. I.e., had we gotten that typical $0.10 range, we would be looking at a guidance along the lines of $4.75 per share at the midpoint (think a $4.70 to $4.80 implied range), much more in line with expectations. Ultimately Ford concluded that the guide represents a forecast that is "derisked, fully funded for long-term growth opportunities, and [allows for] potential upside as we go into the remainder of the year." Segment Results Taking a look at the various operating segments, total Nutrition sales of $2.042 billion (+5.9% YoY organic) was a slight miss versus the $2.058 consensus; total Diagnostics sales of $4.471 billion (+3.3% YoY organic) blew past the $3.585 billion expected; total Established Pharmaceutical sales of $1.203 billion (+5.8% YoY organic) was short versus the $1.248 billion the Street was looking; and total Medical Devices sales of $3.749 billion (+15.9% YoY organic) was a slight miss versus the $3.755 billion expected. Within each segment, the sales numbers were as follows (growth rates on an organic basis): Nutrition Pediatric: $1.039 billion (+3.1% YoY) vs. $1.064 billion consensus Adult: $1.003 billion (+9.0% YoY) vs. $989 million consensus On the Pediatric front, domestic sales increased 14.5% YoY, benefitting from strong demand for Pedialyte and ongoing share growth in infant nutrition such as Similac. International sales were down 8.1% YoY due to "challenging market conditions in China." In Adult, domestic sales were up 4.% YoY while international sales increased 11.6% YoY as the segment benefited from strong demand for Glucerna. Diagnostics Core Laboratory: $1.348 billion (+2.7% YoY) vs. $1.403 billion consensus Molecular: $345 million (-28.4% YoY) vs. $345 million consensus Point of Care: $135 million (+4.9% YoY) vs. $135 million consensus Rapid Diagnostics: $2.643 billion (+9.8% YoY) vs. $2.164 billion consensus On the release, management called out a $2.3 billion contribution to global diagnostics revenue from Covid-related sales. Excluding these sales, global diagnostics sales were up 8.7% YoY in the fourth-quarter. This is notable because while it does indicate that Covid-related sales are masking solid organic growth, it also indicates that much of the headline beat we saw this quarter was due to these Covid-related sales and may explain some of why investors do not appear willing to give full credit to the headline beat Abbott reported. Though again, considering the dynamics of forward guidance, we believe that to be the wrong take. Outside of Covid sales, Abbott's innovative suite of diagnostic instruments, Alinity, continues to show strength as management continues to expand the test menu available across the platform. Moreover, the team noted that in 2021, Abbott "placed more than 3,000 Alinity instruments for immunoassay and clinical chemistry testing, with approximately 2/3 of those placements coming from share capture." Established Pharmaceuticals Key Emerging Markets: $868 million (+5.2% YoY) vs. $927 million consensus Other: $355 million (+7.5% YoY) vs. $327 million consensus As a reminder, Key Emerging Markets include India, Brazil, Russia and China, as well as "several additional emerging countries that represent the most attractive long-term growth opportunities for Abbott's branded generics product portfolio." On the release, management highlighted that the organic sales growth "was led by strong growth across several geographies, including India, Russia and China." Medical Devices Rhythm Management: $541 million (+2.5% YoY) vs. $580 million consensus Electrophysiology: $504 million (+13.5% YoY) vs. $497 million consensus Heart Failure: $239 million (+27.6% YoY) vs. $233 million consensus Vascular: $678 million (+13.2% YoY)vs. $664 million consensus Structural Heart: $419 million (+19.9% YoY) vs. $417 million consensus Neuromodulation $197 million (-7.5% YoY) vs. $214 million consensus Diabetes Care: $1.171 billion (+28.3% YoY) vs. $1.189 billion consensus Management attributed the segment's strong growth to the ongoing recovery from Covid and robust growth in Diabetes Care. Notably, segment sales advanced 15.8% organic versus pre-pandemic levels with the growth versus that period led by "double-digit growth in Heart Failure, Structural Heart and Diabetes Care." On the release, management once again called out FreeStyle Libre performance, noting $1 billion (+36% YoY) of sales in the quarter. On the capital return front, on Dec. 10, 2021, the Board of Directors declared a quarterly dividend of $0.47 per share payable on Feb. 15, 2022 to shareholders of record on Jan. 14, 2022. This marks the 392 nd consecutive quarterly dividend payout for the company and the 50 th consecutive year of dividend increases. Bottom Line While some may nitpick the results due to the impact of Covid testing sales and the full year guidance, we believe that to be an ill-informed, kneejerk reaction by those who failed to listen to the earnings call and read between the lines. Former CEO Miles White invented the UPOD (under promise and over deliver) guide and we wouldn't expect anything different from his successor. Management provided conservative, de-risked guidance that we believe will be raised in future quarters and outside of Covid, the base business continues to grow at a healthy clip — recall, underlying Diagnostics growth was masked by testing dynamics. With shares ~15% off their recent high, where we previously trimmed our position at ~$140, we view Wednesday's action as a buying opportunity and are upgrading shares to a 1 rating. ( Here's a recent post on our portfolio ratings .) (Jim Cramer's Charitable Trust is long ABT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Abbott Chairman of the Board and CEO Robert B. Ford delivers a keynote address at CES 2022 at The Venetian Las Vegas on January 6, 2022 in Las Vegas, Nevada.

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