Abbott's Estimates on the Rise

Earnings estimates for Abbott Laboratories (ABT - Analyst Report) are on the rise following the release of strong fourth quarter and full year 2009 results. Abbott exited 2009 on a strong note with fourth-quarter earnings increasing 11.3% from the year-ago period to $1.18. Full-year earnings increased 12% to $3.72.

Fourth-quarter revenues grew 10.6% to $8,790 million. Revenues were positively impacted by foreign exchange (FX) fluctuations (2.4%). Full-year revenues were $30.8 billion, up 4.2%.

All the revenue segments at Abbott recorded year-over-year growth in the fourth quarter of 2009. While Pharmaceutical division revenues increased 5.2%, Nutritional sales increased 8.8%. Diagnostics and Vascular division sales grew 8.8% and 9.1%, respectively.

2010 Guidance Exceeds Expectations

Management provided better-than-expected guidance for 2010. With pharma peers like Johnson & Johnson (JNJ - Analyst Report) and Pfizer (PFE - Analyst Report) guiding towards single-digit bottom-line growth in 2010, Abbott's earnings guidance of $4.20 to $4.25, representing double-digit growth, is impressive.

Abbott expects strong double-digit revenue growth in 2010, including a favorable foreign exchange impact in the range of 1-2%. The Solvay acquisition should boost total revenues by $3 billion. Meanwhile, key products like Humira and Niaspan should continue contributing significantly to revenues.

While Niaspan should continue benefiting from the favorable Arbiter-6 HALTS data, Humira should benefit from launches in new territories, approval in Japan for Crohn's disease and ankylosing spondylitis and in China for rheumatoid arthritis. We expect Humira to continue growing although at a slower rate. Abbott expects Humira to grow 20% in 2010.

We also expect XIENCE V to continue performing well thanks to recent approvals in countries like Japan, China and Mexico. Japan is the second largest drug-eluting stent market in the world and represents a $500 million - $600 million market opportunity.

Meanwhile, Abbott expects full-year 2010 gross margins to improve to 59.5%, mainly due to an improved product mix and efficiency initiatives, as well as the addition of Solvay. While SG&A spending is expected to increase to more than 27% of sales, R&D expenses are expected at 9.5% of sales.

Estimate Revisions Trend

Based on the company's performance and 2010 guidance, several analysts following the stock have revised their estimates for the company. Over the past 30 days, thirteen of the 20 analysts following the stock have raised their earnings estimates for fiscal 2010 with only 2 analysts moving in the opposite direction.

On balance, 2010 estimates are up 5 cents with the current Zacks Consensus Estimate being $4.24, towards the upper end of the guidance issued by the company. Considering Abbott's previous track record, we believe the company is well-positioned to achieve its guidance. Abbott has consistently met or exceeded its guidance.

We believe that the recent acquisition of Solvay, continued double-digit growth from Humira, strong contributions from the lipid franchise, solid performance of the vascular and diagnostics divisions and new product launches should help Abbott achieve its guidance.

The Solvay acquisition should strengthen Abbott's presence in key emerging markets, where Abbott intends to double its revenues by 2013.

Earnings are also on the rise for fiscal 2011 with 7 of the analysts following the stock raising their estimates over the last 30 days. Only 1 analyst moved in the opposite direction during this time-period. On balance, 2011 earnings estimates have gone up by 9 cents with the current Zacks Consensus Estimate being $4.74.

Meanwhile, we note that 10 of the 15 analysts covering the stock have reduced their earnings estimates for the first quarter of fiscal 2010 over the past 30 days. The downward revision is not surprising as the company provided first quarter guidance that was below expectations.

Abbott is guiding towards first-quarter earnings in the range of 79 – 81 cents per share on strong double-digit revenue growth. Despite forecasting strong top-line growth, Abbott expects bottom-line growth to be affected by lower "other income" from its previous joint venture with Takeda.

On balance, earnings estimates for the first quarter are down by 5 cents with the current Zacks Consensus Estimate standing at 81 cents, towards the upper end of the company's guidance, with no upside potential.

Earnings growth should pick up as the year progresses. We note that Abbott usually starts the year by providing conservative guidance, which is revised upwards as the year progresses.

Earnings estimates for the second quarter of 2010 are up by a couple of cents with 6 of the 15 analysts covering the stock raising their estimates over the past 30 days. Five analysts moved in the opposite direction during this period. If second-quarter results come in-line with the Zacks Consensus Estimate of $1.03, earnings would be up 15.7% from the year-ago period.

In terms of earnings surprises, earnings exceeded the Zacks Consensus Estimate in each of the last four quarters, with a four-quarter average of 2.12%. This means that on average, earnings beat the Zacks Consensus Estimate by 2.12%.

Our Recommendation

We currently have a Neutral recommendation on Abbott, which is supported by the Zacks #3 Rank. Although economic weakness, generic competition for Depakote and foreign exchange headwinds slowed down top-line growth in 2009, we believe Abbott is weathering the storm relatively well.

Abbott's strong business segments, contributions from recent acquisitions and impressive late-stage pipeline should help fortify long-term earnings growth. Humira should remain a significant growth driver, though increasing competition remains a matter of concern.

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