After Abbott Labs Spin-Off, Own ABT or AbbVie?
Now that Abbot Labs has spun-off part of its business into a new company called AbbVie, which is the better stock to own?
That's the dilemma right now for shareholders currently holding Abbott Labs, (ABT) as well as investors looking to put money to work.
"Where there was once only one company, we now have two," explained Cramer, "There's AbbVie (ABBV), the slow growth pharma play with a bountiful 4.7% yield, and the new Abbott Labs, a faster growing company, but with only a 1.7% dividend yield.
So which one should you choose?
"Historically when you see this kind of break up in the healthcare sector, the newly spun off company tends to outperform the parent dramatically over the next year, and even more so over the next two years," Cramer explained.
In other words, ordinarily in this situation the stock to buy would be AbbVie.
"But this is no ordinary spin-off, and that's why I'm telling you to stick with Abbott Labs," Cramer added.
The reason?
Cramer said the whole point of this spin-off was to free Abbott Labs from its pharma business, which in turn should unlock Abbott's growth potential.
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"And make no mistake, the new Abbott Labs is in an excellent position to grow revenues far faster than its peers," said Cramer.
"The company is now a diversified global medical products business with four key segments: nutritionals, medical devices, diagnostics, and established pharma products, the latter meaning generic drugs. The nutritional biz is the largest component and it should expand at a rapid 35% compound annual growth rate over the next three years. Diagnostics is another fast-growing area that I like because it's a major component of helping to contain healthcare costs, and Abbott has room to expand its margins here, too," said Cramer.
"Now, the reason Abbott can grow so quickly is because the company gets 40% of its revenues from emerging markets, especially super fast-growing countries like China and India, and in the next few years that could go to 50%. Its peers, on average, only get about ten to twenty percent of their sales from emerging markets," said Cramer
In other words, .you could think of Abbott as the healthcare way to play emerging markets.
"But just as important, Abbott Labs is retaining the great Miles White as its CEO. White is one of the best execs in the healthcare industry, he's the guy who masterminded the breakup and he's done a terrific job of running the company. If he had decided to go with AbbVie instead, then I would have seriously considered swapping out of Abbott and into AbbVie. He's that good," Cramer explained.
Looking at the numbers, the old Abbott Labs sold for 12 times forward earnings with a 9% long-term growth rate. The new Abbott currently sells for 17 times forward earnings, but it has a higher growth rate in the low-teens.
"This is the multiple expansion I predicted we'd see after the break-up, and it might not be done. I could see the stock going to $38, simply on the strength of the revaluation from the spin-off," Cramer speculated
What's the bottom line?
After the spin-off Cramer thinks Abbott Labs should have more growth potential than AbbVie, Abbott's old pharma division.
"Even though AbbVie sports a juicy 4.7% yield, I think the stock should not be owned here for the simple reason that it has nothing big in the pipeline that would fuel much growth down the road," Cramer said.
In fact, Cramer believes the whole point of this spin off was to get rid of the no growth pharma business that was holding the rest of the company back.
"Stick with Abbott Labs," Cramer concluded.
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