Abbott’s Q2 earnings forecast: The new crown testing business has never been a “long-term business”?

Medical giant Abbott (NYSE:ABT) will announce the latest quarterly financial data before the US stock market on Thursday.

The current market expects the company’s earnings per share to be US$1.02, a year-on-year increase of 78.9%, and revenue is expected to be US$9.67 billion, a year-on-year increase of 31.9%. The adjusted gross profit margin is estimated to be 56.1%. In the past two years, this stock exceeded market expectations for earnings per share about 88% of the time, and exceeded revenue expectations for 63% of the time.

Benefiting from the need for new crown virus testing, Abbott’s stock price has been stable since the outbreak last year. The stock price has risen by more than 20% in the past 12 months. Since the beginning of this year, the stock price has not ushered in an outbreak, with a cumulative increase of 8.67%. This performance is significantly weaker than the performance of the S&P 500 over the same period.

At present, among the Wall Street analysts surveyed by Investing.com, 18 analysts have given the company a "buy" rating, 3 have given the company a "neutral" rating, and one analyst has given the company a "sell" rating. “Out” rating, the 12-month average target price is 125.42 US dollars, compared with the current price, there is still 5.41% upside room.

Investors are waiting for Abbott’s financial report data to judge the company’s performance development space in the market outlook. The epidemic will continue to be Abbott’s double-edged sword. On the one hand, the United States has reached a high vaccination rate of more than 48%, so testing demand will further decline during the peak period, which will affect Abbott’s new crown testing demand; However, on the other hand, as the epidemic subsides, other Abbott businesses may rise. However, the Delta virus will also bring uncertainty to Abbott’s business. Investors can pay attention to the management’s outlook for the market outlook.

First of all, we must consider that Abbott’s testing business developed rapidly during the epidemic, but now it is facing the reduction of this part of the business and cutting costs.

During the epidemic, Abbott also invented BinaxNOW, an over-the-counter home testing device for the new coronavirus, which greatly increased sales of its diagnostic products. In the first quarter of this year, the department brought in revenue of 2.2 billion U.S. dollars, but the data was 2.4 billion U.S. dollars in the fourth quarter of last year. It can be seen that the current trend has been declining.

Abbott also wrote in a statement before: “We have recently seen a significant and rapid decline in the demand for new crown testing, and we expect this trend to continue.” The company previously sharply lowered its earnings forecast for this year and currently expects the full year. The adjusted diluted profit was US$4.30-4.50 per share, lower than the previously expected US$5.0.

Raymond James analyst Jayson Bedford wrote in the report, “Unfortunately, Abbott’s current weakness is in line with the facts, but we still have reasons to maintain a'buy' rating”, but he lowered the target price from $130. To 116 dollars.

However, Abbott’s investors should have been conscious long ago that COVID-19 testing will not become the company’s long-term revenue driver.

But now, Abbott needs to face not only the decline in testing demand, but also the cost consumption in the process of reducing this business. The company currently estimates that this cost may be as high as 700 million US dollars, including the deduction of fixed assets, contract cancellation and related staff costs.

Abbott’s cuts seem to have begun, after news that Abbott plans to lay off more than 400 employees in Maine. In May 2020, due to the increased demand for new crown test products due to the new crown epidemic, Abbott announced that it would expand the number of employees to about 1,200 in a Westbrook factory that produces new crown test kits. In September 2020, Abbott added approximately 2,000 jobs in Illinois for the same purpose.

However, investors do not seem to need to worry too much. Even after the new crown epidemic is brought under control, Abbott’s growth prospects remain bright because it has a diversified investment portfolio that produces a range of products from blood glucose monitoring to surgical tools. In the post-epidemic era, the company's other businesses will continue to flourish. Therefore, although the company's latest profit forecast has been cut, it is still more than 20% higher than the full-year profit in 2020.

In any case, Abbott is still our favorite old-fashioned dividend stock. As a global manufacturer of medical equipment, generic drugs and nutritional products, the company has paid dividends every year for nearly half a century. The company’s quarterly dividend is $0.45 per share. The annual dividend rate is 1.52%. In the past 5 years, this expenditure has grown by more than 8% annually. This is enough to give it a place in your portfolio. Long-term investors can pay attention to the stock when the earnings report is announced and Abbott’s stock price fluctuates to increase the margin of safety.