A Low-Risk Emerging Markets Play

07/18/2013 7:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Emerging markets sold off fiercely this year, burning a lot of US investors who piled in after the top, but MoneyShow's Jim Jubak, also of Jubak's Picks, says that investors could get less risky exposure to these fast-growing economies through this big US pharma stock instead.

Before the New York markets opened Wednesday, Abbott Laboratories (ABT) reported earnings of 46 cents a share, excluding one-time items. That was two cents a share above Wall Street expectations. Revenue for the quarter, at $5.45 billion, was short of the $5.52 billion consensus. Sales took a hit thanks to a strong dollar. Excluding currency effects, sales climbed 4.2% year over year. Including currency effects, sales were up just 1.7%.

The huge impact of currencies is exactly what you'd expect for Abbott Laboratories in this quarter and what you can expect going forward. This Illinois-based company is increasingly focused outside the United States, and increasingly that's where the company's growth is coming from.

For example, in this quarter, the company's nutritionals business was its fastest growing unit with an 8.4% increase in sales from operations. The international growth rate for sales in that unit, however, was 18.4%.

For the company as a whole, sales to emerging market economies totaled $2.3 billion, an increase in operating revenue of 13.4%. Emerging market sales made up 42% of total company sales in the quarter. Sales in China and Russia climbed by more than 30% in each market.

The presence of those two countries at the top of Abbott's growth market list isn't without its downside. The Russian economy is in trouble and China's is slowing. (And China has also launched investigations into price fixing in the baby formula market and into bribery in the drug market that have the potential to reduce prices and slow sales for many overseas companies in China.) But Abbott's approach to emerging markets has been to target 14 high growth economies rather than putting all of its efforts into one or two markets. I think that means Abbott's emerging markets growth will hold up reasonably well-although every forecast I've seen recently is pointing to a slowdown in global growth.

The company confirmed its forecast for 2013 earnings of $1.98 to $2.04 a share, excluding one-time items. The Wall Street projection calls for $2.01 a share.

I think the emerging market focus of Abbott Laboratories and the company's long-term emphasis in those markets on categories such as pediatric nutrition and diagnostics makes this a good long-term holding for patient investors. In the short-run, I think price gains will be relatively modest, but I also think this is a low-risk holding. I'd put an end-of-the-year target price of $40 on these shares. (Abbott Laboratories is a member of my Jubak's Picks portfolio.) The stock pays a dividend yield of 1.57%. The next quarterly dividend of 14 cents a share will be paid on August 15 to shareholders of record as of July 15.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund's portfolio here.

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