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Abbott Laboratories (ABT - Analyst Report) reported fourth quarter 2013 earnings of 58 cents per share, in line with the Zacks Consensus Estimate.

Earnings increased 20.8% from the year-ago quarter. Including one-time items, fourth quarter earnings came in at 37 cents per share, down from 66 cents in the year-ago quarter.

Abbott Labs generated sales of $5.6 billion in the fourth quarter of 2013, up 0.4% year over year, but fell short of Zacks Consensus Estimate of $5.7 billion. The year-over-year growth was primarily driven by the solid performance of the Diagnostics and Medical Devices segments.

However, the disruption in Abbott Labs’ international nutrition business in Aug 2013 negatively impacted its fourth quarter sales by 1.5% points. Moreover, unfavorable movement in foreign exchange rates negatively impacted sales by 2.9%.

Total sales in 2013 came in at $21.8 billion, falling short of the Zacks Consensus Estimate of $21.9 billion. Earnings per share came in at $2.01 in 2013, in line with the Zacks Consensus Estimate.

Fourth Quarter in Detail

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

EPD sales declined 4.3% year over year to $1.3 billion including a negative impact of 5.0% due to currency fluctuations. Sales in key emerging markets increased 10.1% on an operational basis (excluding foreign currency fluctuations) driven by growth in Brazil, Russia and China.

However, sales from other markets declined 6.7% on an operational basis due to weak market conditions, particularly in Western Europe.  Abbott Labs expects to focus on key emerging markets in 2014.

The Medical Devices business generated sales of $1.4 billion, up 2.0% year over year mainly due to strong performance in the Medical Optics business, which was up 10.9%. Cataract sales, accounting for more than 65% of total Medical Optics sales, outpaced the overall market and recorded double-digit growth.

The Vascular business was up 1.7% driven by the continued uptake of drug eluting stent systems - Xience Xpedition and Absorb in key geographies. However, Diabetes Care sales were down 4.4% due to the implementation of CMS or the competitive bidding for Medicare patients in the U.S.

As expected, the Nutrition business was down 0.8% year over year to $1.7 billion. Pediatric Nutrition sales, accounting for 55% of total nutrition sales, declined 3.2% as sales in this business were adversely impacted by a supplier recall in early Aug 2013 in certain international markets. This sales disruption is estimated to have reduced sales by approximately $90 million in the fourth quarter in international Pediatric Nutrition business.

Adult Nutrition sales grew 2.3%, driven by solid growth of its key brand Ensure.  Nevertheless, pediatric nutrition sales from international markets are expected to recover in 2014.

Diagnostics business sales increased 5.9% year over year to $1.2 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 5.9% and Point of Care Diagnostics increased 13.9%. However, worldwide sales of Molecular Diagnostics were down 0.2%.

2014 Outlook

Abbott Labs expects earnings per share in the range of $2.16 to $2.26 in 2014. The Zacks Consensus Estimate currently stands at $2.24 per share, well within the company’s guidance. Shares were down in pre-market trading.

In Oct 2013, 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. The company also expects to repurchase shares of more than $2 billion in 2014. 

Our View

Abbott Labs currently carries a Zacks Rank #3 (Hold). The year 2013 was challenging for Abbott Labs due to austerity measures in developed markets and weak economic conditions on a global basis. We were disappointed by the disruption in international markets of the Nutrition business which was one of the fastest growing businesses for Abbott Labs. The disruption is likely to stretch into the first half of 2014.

Nevertheless, we believe that Abbott Labs is extremely diversified with its 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.

The Medical Devices and Diagnostics business looks promising. The new product launches in 2013 should drive growth going forward. We are also impressed by the company’s efforts to return value to shareholders through share repurchases and dividends.

Some better ranked pharma stocks include Allergan (AGN - Analyst Report) and Lannett Company, Inc. (LCI - Snapshot Report). Both carry a Zacks Rank #1 (Strong Buy).

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