Buy Abbott Laboratories

Abbott Laboratories, Inc. (ABT - Analyst Report) currently trades at 12.5x our 2009 EPS estimate of $3.66 -- slightly more "expensive" than the peer average of 11.1x, but we believe the premium is warranted. Abbott offers potentially the strongest combination of growth and relative risk in all of the large-cap pharma space.

Abbott has some very strong business segments and a great late-stage pipeline. We expect operating margins to begin to widen in 2009 from a combination of expanding gross margins and leveraging the relatively large SG&A spend in 2008 in support of new indications and product launches including XIENCE V. This, coupled with strong revenue growth from every business segment and the recently announced $5 billion share repurchase program, should help EPS grow at a 5-year CAGR of over 9% through 2013.

While sales were relatively flat in the first quarter and are only expected to grow about 2% for all of 2009, most of the slower growth is explained by foreign exchange and the weak economy. We expect both circumstances to be relatively short-term events. Management’s guidance for 2009 includes revenue growing in the low single digits and EPS of $3.65 - $3.70, growth of 9% - 11%.  Revenue guidance assumes a foreign exchange headwind of about 6.5%, which implies operational growth of almost 10%. We look for sales of $30.2 billion and EPS of $3.66 in 2009.

XIENCE V has exceeded all expectations and has claimed almost 30% U.S. market share after only nine months on the market. The recent growth in PCI procedure trends, further DES penetration and additional launches of the XIENCE V and newer stent products should be significant catalysts to continue to drive the vascular business.

The recent acquisition of Kos Pharmaceuticals is a sign that Abbott is actively seeking to grow the pharmaceutical business, especially in the area of cardiovascular care. Although investors could argue that the company paid a heavy premium and lofty price tag of $3.7 billion to acquire Kos, we believe that Abbott will be able to significantly leverage the Niaspan and Simcor compounds with potential combinations with TriCor and AstraZeneca’s (AZN - Analyst Report) Crestor to help drive earnings accretion in 2009 and beyond.

We expect the lipid franchise to be a major focus for Abbott going forward. Certriad, if approved, could launch as early as the second quarter 2010, and has the potential to be a significant contributor to growth of Abbott’s lipid business. The AMO transaction should help further diversify Abbott’s product suite and should add a solid growth opportunity, especially as the global economy recovers.  Finally, the divestiture of the TAP joint venture sheds Prevacid, which will be faced with severe generic competition, and allows Abbott to focus on higher-growth businesses including its oncology and lipid platforms.

Competitively speaking, Abbott is in a good position. Despite a few challenges ahead, including the influx of Depakote generics, we feel there’s significantly more to look forward to than there is to worry about. While economic weakness has slowed sales of a number of products in 2009, Abbott is weathering the storm relatively well. This was highlighted by first quarter EPS coming in $0.02 ahead of guidance and the company affirming previously issued full-year EPS guidance.

Humira will continue to be a huge driver of growth for years to come. The late-stage line-up includes a number of initial approvals and additional indications which will help fortify strong long-term EPS growth. Abbott had nine major regulatory approvals in 2008 and expects several more in 2009. As such, we believe Abbott shares will continue to trade at a premium to the broader large-cap pharmaceutical market.

Abbott also possesses a lower risk profile than smaller players in the industry. Although the stock remains one of the more expensive names in the large-cap pharma space, we feel it’s well deserved. We believe, based on Abbott’s very strong line-up of current products -- along with its formidable pipeline -- that there’s further room for the multiple to expand. We recommend investors purchase the name as a long-term holding.

Our price target is $65, or 17.8x our 2009 EPS estimate of $3.66.

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