Abbott Laboratories Stock Appears To Be Modestly Overvalued
- By GF Value
The stock of Abbott Laboratories (NYSE:ABT, 30-year Financials) shows every sign of being 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 $120.08 per share and the market cap of $212.7 billion, Abbott Laboratories stock is believed to be 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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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Abbott Laboratories has a cash-to-debt ratio of 0.36, which which ranks worse than 85% of the companies in the industry of Medical Devices & Instruments. The overall financial strength of Abbott Laboratories is 6 out of 10, which indicates that the financial strength of Abbott Laboratories is fair. This is the debt and cash of Abbott Laboratories over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Abbott Laboratories has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $37.3 billion and earnings of $3.19 a share. Its operating margin of 17.97% better than 79% of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks Abbott Laboratories's profitability as fair. 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.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Abbott Laboratories's ROIC is 11.12 while its WACC came in at 5.12. The historical ROIC vs WACC comparison of Abbott Laboratories is shown below:
Overall, the stock of Abbott Laboratories (NYSE:ABT, 30-year Financials) 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.