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Abbott Laboratories (ABT - Analyst Report) reported third quarter 2013 earnings of 55 cents per share, beating the Zacks Consensus Estimate of 51 cents.

Earnings increased 31.0% from the year-ago quarter, beating management’s guidance range of 51-53 cents. Including one-time items, third quarter earnings were 49 cents per share, up from 21 cents in the year-ago quarter.

Abbott Labs generated sales of $5.4 billion in the third quarter of 2013, up 2.0% year over year, and in line with the Zacks Consensus Estimate.

The year-over-year growth was primarily driven by the solid performance of the Diagnostics and Medical Devices segments.

However, sales in the third quarter were adversely impacted by the disruption in international Nutrition sales. Moreover, unfavorable movement in foreign exchange rates negatively impacted sales by 2.3%.

Quarter in Detail

Abbott Labs operates through four segments, namely Established Pharmaceuticals Division (EPD), Medical Devices, Diagnostics, and Nutrition.

EPD sales declined 2.9% year over year to $1.2 billion including a negative impact of 3.5% due to currency fluctuations. This division primarily focuses on 14 key emerging markets where sales declined 3.4%.

Although recent macroeconomic factors and market pressure in certain emerging markets have resulted in somewhat slower sales growth in the third quarter, Abbott Labs expects growth rates in the emerging markets to continue to outpace the overall global economy and remain attractive in the long run. Sales in other markets including developed markets like Western Europe and Japan, among others declined 2.4%.

The Medical Devices business generated sales of $1.3 billion, up 1.9% mainly due to a strong performance in the Medical Optics business, which was up 7.3%. Cataract sales, accounting for 60% of total Medical Optics sales, outpaced the overall market and recorded double digit growth. The vascular business was up 0.6% driven by the continued uptake of drug eluting stent systems - Xience Xpedition and Absorb in key geographies. Diabetes Care sales were up 0.4% driven by growth in the emerging markets.

The Nutrition business grew 1.9% year over year to $1.6 billion. Pediatric Nutrition sales, accounting for 55% of total nutrition sales, grew 1.9% as sales in this business were adversely impacted by a supplier recall in early Aug 2013 in certain international markets. Adult Nutrition sales grew 2.0% led by solid growth from its key brand Ensure. Pediatric Nutrition sales from international markets are projected to be lower than previous expectations in the fourth quarter of 2013 and in the first half of 2014.

Diagnostics business sales increased 8.0% year over year to $1.1 billion. Key areas of focus in this division include the Core Laboratory Diagnostics, Molecular Diagnostics, and Point of Care Diagnostics businesses. Core Laboratory sales increased 6.3% and Point of Care Diagnostics increased 16.5%. Worldwide sales of Molecular Diagnostics increased 15.0%.

2013 Outlook Reiterated

Abbott Labs continues to expect earnings per share in the range of $1.98 to $2.04 in 2013. The Zacks Consensus Estimate currently stands at $2.00 per share, well within the company’s guidance. Shares were up in pre-market trading.

Concurrent with the third quarter results, Abbott Labs announced a 57% increase in its quarterly dividend to 22 cents from 14 cents. The increased dividend will be paid in Feb 2014.

Our View

Abbott Labs currently carries a Zacks Rank #3 (Hold). Although earnings beat expectations, we were disappointed by the disruption in international markets of the Nutrition business. The disruption is likely to stretch into the first half of 2014. We note that the Nutrition division is the company’s fastest growing business and hence a disruption in business will impact growth rates going forward.

Moreover, the business environment is likely to be challenging for Abbott Labs in the EPD segment due to austerity measures in developed markets and weak economic conditions elsewhere.

Nevertheless, we believe that Abbott Labs is extremely diversified with a presence in nutrition, diagnostics, generic pharmaceuticals and medical devices markets after having separated its proprietary pharmaceutical business into a new company called AbbVie (ABBV - Analyst Report) in early 2013.

We are also impressed by the company’s recent efforts to further broaden its expansive portfolio. During the third quarter, Abbott Labs completed the previously announced acquisition of OptiMedica in a bid to expand its vision care business into the rapidly developing laser-assisted cataract surgery market. The company also acquired IDEV Technologies to broaden its existing portfolio of endovascular products designed to treat patients with peripheral artery disease.

Right now, other large-cap pharma stocks like GlaxoSmithKline (GSK - Analyst Report) and Bayer (BAYRY - Analyst Report) look attractive. Both carry a Zacks Rank #2 (Buy).

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