A Bet on Abbott

02/22/2016 8:00 am EST

Focus: STOCKS

John Eade

President and Senior Analyst, Argus Research Group

Our latest featured recommendation is a diversified healthcare company whose product lines are nutritionals, diagnostic systems, vascular implants, and diabetes care products, explains John Eade of Argus Research.

The healthcare sector has been the sector leader since the start of the bull market in March 2009.

It continues to benefit from its perceived insulation from economic turbulence. In addition, many healthcare stocks have benefited as the pool of people with insurance expands under the Affordable Care Act.

We are upgrading Abbott Laboratories (ABT) to buy from hold. We expect its planned acquisition of Alere (ALR) to be accretive to earnings and to make Abbott a leader in point-of-care diagnostics.

In addition, Abbott is benefiting from its acquisitions of CFR Pharmaceuticals and Veropharm, which have boosted sales in emerging markets and is generating solid results.

We think this is a shrewd acquisition as point-of-care diagnostics are growing faster than traditional medical laboratory testing.

In contrast with traditional lab testing, point-of-care tests, which are carried out at the patient’s bedside, provide results more quickly and can thus speed up clinical decision making.

Point-of-care tests are also helpful in developing countries, especially in small communities without easy access to laboratory facilities.

Excluding currency headwinds and the impact of economic weakness in Venezuela, we expect the company to generate strong double-digit growth in adjusted EPS this year.

In December 2015, Abbott announced an 8.3% increase in its quarterly dividend to $0.26 per share, or $1.04 annually, for a projected yield of about 2.7%.

ABT shares trade at 14.9-times our 2017 EPS estimate, below the average multiple of 15.5 for our coverage universe of med-tech stocks.

In all, we see the Alere deal as a potential catalyst for the stock and believe that the recent pullback provides a favorable entry point.

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