The Best of Both Abbotts?

04/18/2012 3:35 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Although investors seem to be waiting to jump in until the big pharma splits into two companies later this year, the smart move may be to take advantage of the stock’s discount now, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Nothing wrong with the first-quarter earnings numbers from Abbott Laboratories (ABT). In fact, I’d call them “strong” and “above expectations.”

In fact, the only disappointment has been the market’s failure to put the higher price on the shares that I think they deserve. The company did report 13% earnings growth this morning, and the stock still trades at a price-to-earnings ratio of just 12.4 on trailing 12-month earnings, or 12.1 on projected 2012 earnings per share.

The shares are up 9.23% in 2012. Not shabby, but the gain does trail the 11.27% for the S&P 500. (Abbott Laboratories is a member of my Jubak’s Picks portfolio.)

My suspicion, as I’ve noted before, is that at least part of this lag is related to the breakup of Abbott Laboratories into two companies, which is scheduled for completion by the end of 2012. That move is intended to release the market value of some of Abbott’s real but overlooked strengths in nutritionals and diagnostics, for example.

I think the split will indeed do that in, say, 2013, but in the meantime it seems to be damping gains in the stock. Could be that investors who would like to own the faster-growing post-split drug company, or the medical devices/generics/nutritionals company, would rather wait until they can buy exactly the piece that they want, rather than having to sell off shares in the piece they don’t wish to keep.

Wall Street analysts have put a sum-of-the-parts price of $60 to $65 on the post-split shares, and that works as a kind of ceiling for Abbott’s current share price.

Another part of the problem, though, is a more typical drug industry issue: increased competition for Humira, the arthritis drug that is Abbott’s bestseller, and for the company’s TriCor/Trilipix and Niaspan cholesterol drugs.

The bigger of those two issues is competition for Humira, which contributed about 20% of the company’s revenue in 2011. Sales of Humira rose 17% year-to-year in the first quarter.

As of April 18, I’m not changing my target price. I think you can still look forward to a target price of $65 a share in the fall, say October 2012. Add in the stock’s current 3.4% yield. and the total potential return may not be enough to make your heart race, but it’s very attractive to my mind in the current risky market environment.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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