Tariffs In 2025 And Declining Diagnostics Will Narrow Net Margins

Key Takeaways

• Tariffs and VBP challenges in China may hinder revenue growth, despite mitigation strategies and exploration of new business opportunities outside China.
  
• Significant investments in new market opportunities, such as nucleic acid testing and advanced medical technologies, may compress margins before driving long-term growth.
  
• Abbott's diversified strategy, strong innovation pipeline, and effective operational management drive growth and stability despite macroeconomic challenges.

Catalysts

Abbott Laboratories, together with its subsidiaries, discovers, develops, manufactures, and sells health care products worldwide.

• Abbott Laboratories is expecting tariffs introduced in 2025 to have a financial impact, particularly affecting its U.S. and China operations. While the company plans to mitigate this through its globally diversified manufacturing sites, the initial impact is estimated to be a few hundred million dollars. This could affect forecasted revenue and net margins, depending on the effectiveness of the mitigation strategies.
  
• The diagnostics segment, particularly impacted by volume-based procurement (VBP) programs in China, is experiencing declining sales. Management is attempting to offset this through new business opportunities in regions outside China. However, ongoing challenges in China due to VBP may impact future revenue growth.
  
• Abbott's entry into the nucleic acid testing market for blood screening presents a $1 billion opportunity but involves significant investment in new manufacturing and R&D facilities. This may initially increase expenses, potentially affecting net margins and earnings in the near term before revenue growth kicks in.
  
• The launch of the Volt PFA system and its expansion into the European market positions Abbott for future growth in the Electrophysiology segment. However, any delays or challenges in scaling up these launches could temper expected revenue growth from this segment.
  
• The implementation of new technology in leadless pacemakers (Aveir) and other medical devices is anticipated to drive future growth. Yet, the substantial investment required for R&D and training may compress net margins until these technologies significantly penetrate the market and contribute to revenue.

Abbott Laboratories Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Abbott Laboratories's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.8% today to 17.2% in 3 years time.
• Analysts expect earnings to reach $9.0 billion (and earnings per share of $5.23) by about April 2028, down from $13.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.6x on those 2028 earnings, up from 17.0x today. This future PE is greater than the current PE for the GB Medical Equipment industry at 29.5x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Abbott Laboratories Future Earnings Per Share Growth

Risks

• Abbott's diversified business model and strategic global manufacturing framework mitigate financial impacts from tariffs, which may positively affect net margins and ensure stable earnings.
  
• High single-digit growth in several sectors, including Adult and Pediatric Nutrition, and double-digit growth in Medical Devices, particularly Diabetes Care and Electrophysiology, suggest strong revenue potential despite macroeconomic challenges.
  
• The introduction of new products, such as the Alinity m system for nucleic acid testing and Volt PFA system, indicates robust market expansion opportunities, supporting future revenue and earnings growth.
  
• Abbott's focus on innovation and product development, with over 25 new product launches expected in the next three years, provides continued avenues for revenue enhancement and margin expansion.
  
• The company's ability to expand gross margin by 140 basis points and operating margin by 130 basis points exemplifies its effective operational management, positively impacting overall financial performance and stability.

Valuation

• The analysts have a consensus price target of $140.848 for Abbott Laboratories based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $159.0, and the most bearish reporting a price target of just $111.34.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $52.4 billion, earnings will come to $9.0 billion, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $131.73, the analyst price target of $140.85 is 6.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.