Transcript Chris Zakhem

NYSE:ABT
Chris Zakhem | Mengxi (Vivian) Wang | Le Huong Hoang | Ziqi (Kay) Mai
October 29, 2015
1
Team Introduction
Chris Zakhem
Vivian Wang
Investment Manager
B.S. in Finance
Investment Manager
B.S. in Finance and
Accountancy
Le Huong Hoang
Ziqi Mai
Investment Manager
Masters of Finance
Investment Manager
Masters of Finance
2
Agenda
Macroeconomic Overview
Company Overview
Stock Market Overview
Client
Logo
4-8
9-18
19
Financial Analysis
20-21
Comparable Companies
22-24
Financial Projections
Valuation
Recommendation
25
26-27
28
3
Macroeconomic Overview
Population
Client
Logo
The decreasing birthrate will potential decrease the pediatric segments but the increase in
the aging population will bolster sales
http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf
4
Macroeconomic Overview
Client
Logo
Gross Domestic Product
Key indicator
2014
2015
2016
2017
2018
2019
2.4
2.5
2.4
2.4
2.6
1.4
1.6
0.3
1.7
2.3
2.5
2
-2.8
-2.7
-2.4
-2.3
-2.2
-2.4
Exchange rate ¥:US 105.9 122.1 124.4
124
122
122
World GDP growth
GDP growth rate
Consumer price
inflation
Federal Government
Budget Balance (%
of GDP)
GDP Growth, Projected 2015-2019
10
8
6
4
2
0
-2
US
Brazil
Russia
India
China
World
-4
World Trade Growth
2.3
2.4
2.8
2.8
2.9
2.5
3
3.7
5
5.5
5.6
5.6
-6
2015
2016
2017
2018
2019
The GDP growth rate in the U.S. and the world will increase until 2018 then decrease
slightly in 2019
http://www.eiu.com/home.aspx
5
Macroeconomic Overview
U.S. Health Spending
Client
Logo
The U.S. health spending is expected to increase with a growth rate of 5.8%
6
http://www.iahc.com; https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/proj2014.pdf
Macroeconomic Overview
Pharmaceutical Industry
Client
Logo
There is an increase in pharmaceutical sales worldwide
7
Macroeconomic Overview
Client
Logo
Demand for medicine in the emerging market
Exchange rate ¥:US$ (av)
130
125
120
115
110
105
100
95
2014
2015
2016
2017
2018
2019
There is a rising demand for medicine in the emerging markets, but the strong dollar
negatively affects the international sales
http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/assets/pwc-pharma-success-strategies.pdf
8
Company Overview
Client
Logo
Segments
Products
Established
Pharmaceutical
Products
Key Emerging
Markets
Other Emerging
Market
Diagnostic
Products
Immunochemistry
Nutritional
Products
Vascular Products
/Medical Devices
International
Pediatric
Nutritionals
Endovascular
U.S. Pediatric
Nutritionals
Coronary Deices
International Adult
Nutritionals
U.S. Adult
Nutritionals
Abbott has four main segments with multiple sub-segments within them
Abbott 2014 10-K, pgs. 1-4
9
Company Overview
Client
Logo
Revenue Outlook
(In Millions)
2013
2014
9M 2015
NET SALES
21,848
20,247
15,217
NET INCOME
2,383
2,284
3,656*
9 month income in 2015 includes $1,752M gain on the sale of the developed markets
branded generics pharmaceuticals and animal health businesses to Mylan and Zoetis in
February 2015.
Abbott 2014 10-K pg. 47; 2015 Q3 8-K pgs. 2-6
10
Company Overview
Revenue Breakdown
Abbott 2014 10-K pg. 29; 2015 Q3 8-K pgs. 2-6
Client
Logo
11
Company Overview
Client
Logo
Revenue Breakdown
% OF TOTAL SALES
U.S
30%
Geography
50% of total sales
from Emerging
Market
Abbott 2014 10-K pg. 23
International
70%
12
Company Overview
Established Pharmaceutical Segment
Client
Logo
Product
Gastroenterology products, women's health products, cardiovascular
and metabolic products, pain and central nervous system products,
respiratory drugs and vaccines
Market
Outside United State
Consumer
Wholesalers, distributors, government agencies, health care facilities,
pharmacies, and independent retailers from Abbott-owned distribution
centers and public warehouses
Challenge
Increasing competitive pressure
Strategy
Build a strong brand and expand business in the emerging market
Event
1. Sold its developed markets branded generics pharmaceuticals business to
Mylan Inc. in February 2015.
2. Completed its acquisition of a controlling interest in CFR Pharmaceuticals
S.A. (CFR) in September 2014.
3. Acquired control of Veropharm in December 2014.
Abbott 2014 10-K pgs. 1-4
13
Company Overview
Diagnostics Segment
Client
Logo
Product
Immunoassay and clinical chemistry systems (main product)
Market
Worldwide
Consumer
Blood banks, hospitals, commercial laboratories, clinics, physicians' offices,
government agencies, alternate-care testing sites, and plasma protein
therapeutic companies
Challenge
Subject to competition in technological innovation, some products in this
segment can be subject to rapid product obsolescence or regulatory changes
Strategy
Improve operating margin
Event
1. Completed the acquisition of Topera in December 2014.
Abbott 2014 10-K pgs. 1-4
14
Company Overview
Nutritionals Segment
Client
Logo
Product
Various forms of prepared infant formula and follow-on formula, adult
and other pediatric nutritional products, nutritional products used in
enteral feeding in health care institutions
Market
Worldwide
Consumer
Institutions, wholesalers, retailers, health care facilities, government agencies,
and third-party distributors from Abbott-owned distribution centers or thirdparty distributors.
Challenge
Subject to product obsolescence caused by regulatory change, new product
introduction by competitors,
Strategy
Take advantage of an aging population and an increasing rate of chronic disease,
introduce new products and improve operating margin
Event
1. A product recall initiated in August 2013 in China and two other markets for
certain pediatric nutritional products supplied to Abbott by a third-party
manufacturer.
Abbott 2014 10-K pgs. 1-4
15
Company Overview
Vascular & Medical Device Segment
Client
Logo
Product
A broad line of coronary, endovascular, vessel closure, and structural
heart devices for the treatment of vascular disease
Market
Worldwide
Consumer
Hospitals & public warehouses
Challenge
Pricing pressures primarily related to drug-eluting stent (DES) franchise.
Strategy
Improve operating margin and continue to develop its worldwide marketleading DES
Event
1. Acquired 100 percent of IDEV Technologies in August 2013.
2. Acquired 100 percent of OptiMedica in August 2013.
Abbott 2014 10-K pgs. 1-4
16
Porter’s Five Forces Analysis
Client
Logo
Threat of New
Entrants
*Low
Threat of
Substitutes
Rivalry
*High
*High
Buyer Bargaining
Power
*Low
Investment Team
Supplier
Bargaining
Power
*Moderate
17
SWOT Analysis
>Strengths
- Well-established brands
- Stable Net Sales
- High operating margin
- New footprint into new markets
Client
Logo
> Weakness
- No assurance of new products from R&D
outcomes
- High competition
- Strong regulation by government
- Patents protected
SWOT
Analysis
>Opportunities
- Increasing global medical spending
- Aging problems in emerging market
- Products exposed to new market
Abbott 2014 10-K pgs. 4-7; Investment Team
>Threats
- Potential lawsuits and regulation costs on pollution
- Rapid product obsolescence
- Downward pressure of revenue or product pricing
due to government regulation
- Foreign currency exchange rate risk
- Expiration or loss of patent protection
- Competition
18
Stock Market Overview
Client
Logo
There was a potential sell signal around the end of September but the stock seems to be
recovering
Yahoo! Finance
19
Financial Analysis
Client
Logo
Ratios Analysis
Gross Margin
Return on Assets
Interest Coverage Ratio
9.4%
57.3%
4.7%
54.5%
53.3%
16.53x
14.71x
7.2%
17.33x
5.4%
53.2%
4.25x
Net Income Margin
31.3%
Total Asset Turnover
Current Ratio
0.22x
30.6%
2.36x
0.17x
0.14x
13.1%
11.3%
2.30x
2.02x
0.10x
1.45x
Most of Abbott’s ratios have been generally improving over time with the exception of the
total asset turnover ratio
Abbott 2014 10-K pgs. 47-50; 2015 Q2 10-Q pgs. 3-6
20
Financial Analysis
Client
Logo
DuPont Analysis
Tax Burden
Interest Burden
Operating Margin
187.7%
12.8%
13.3%
10.9%
126.2%
122.4%
95.7%
7.1%
96.9%
90.7%
Asset Turnover
Leverage
48.1%
Return on Equity
23.5%
2.51
35.7%
1.91
29.9%
13.7%
1.91
10.3%
23.6%
1.70
7.9%
Abbott’s return on equity has been improving since its spin-off of Abbvie at the beginning
of 2013
Abbott 2014 10-K pgs. 47-50; 2015 Q2 10-Q pgs. 3-6
21
Comparable Companies
Descriptions
Client
Logo
Thermo Fisher Scientific, Inc.
•Provides analytics instruments, equipment, reagents and consumables, software, and services for
research, manufacturing, analysis, discovery, and diagnostics worldwide
•Groups include Life Sciences, Analytical Instruments, and Specialty Diagnostics
Medtronic plc
•Sells device based medical therapies worldwide
•Groups involve Vascular, Minimal Invasive Therapy, and Restorative Therapy
St. Jude Medical Inc.
•Manufactures and distributes cardiovascular medical devices for cardiac rhythm management,
cardiovascular, and atrial fibrillation therapy areas worldwide
•Groups include Implantable Electronic Systems and Cardiovascular and Ablation Technologies.
Stryker Corporation
•Operates as a medical technology company
•Groups include Orthopaedics, Medical Surgery, and Neurotechnology and Spine
Boston Scientific Corporation
•Develops, manufactures, and markets medical devices for use in various interventional medical
specialties worldwide
•Groups include Cardiovascular, Rhythm Management, and Medical Surgery
These comparable companies were narrowed down by business description and industry
and are competitors with Abbott
Capital IQ
22
Comparable Companies
Analysis
Client
Logo
Median multiples were chosen and were equally weighted to come a valuation of $46.20
per share
Capital IQ
23
Weighted Average Cost of Capital
Cost of Debt
Client
Logo
Cost of Equity
WACC
The weighted average cost of capital was calculated to be 8.86% but a risk premium was
added to round the WACC to 9.00%
Abbott 2014 10-K pg. 68; 2015 Q2 10-Q pg. 24; Federal Reserve; Ibbotson's SBBI
24
Financial Projection
Revenue Drivers and Assumptions
2012
Pharmaceuticals
$2,769.00
% Change total
Key Emerging Market
% Change
Other Emerging Market
% Change
Nutrition
$6,461.00
% Change total
International Pediatric
$2,075.0
% Change
Diagnostics
$3,279.00
% Change
Vascular
$2,739.00
% Change
Other
$3,802.00
% Change
Total
$19,050.00
% Growth
Investment Team
2013
$2,862.00
3.36%
$2,281.0
$581.0
$6,740.00
4.32%
$2,257.0
8.77%
$3,458.00
5.46%
$2,648.00
-3.32%
$3,949.00
3.87%
$19,657.00
3.19%
2014
2015E
2016E
2017E
2018E
2019E
$3,118.00
$3,883.30
$4,283.98
$4,750.38
$5,279.61 $5,785.53
8.94%
24.54%
10.32%
10.89%
11.14%
9.58%
$2,308.0
$3,000.4
$3,330.4
$3,730.1
$4,177.7
$4,595.5
1.18%
30.00%
11.00%
12.00%
12.00%
10.00%
$810.0
$882.9
$953.5
$1,020.3
$1,101.9
$1,190.1
39.41%
9.00%
8.00%
7.00%
8.00%
8.00%
$6,953.00
$7,061.00
$7,214.11
$7,392.54
$7,572.34 $7,728.48
3.16%
1.01%
1.49%
1.54%
1.77%
1.70%
$2,357.0
$2,451.3
$2,537.1
$2,613.2
$2,678.5
$2,732.1
4.43%
4.00%
3.50%
3.00%
2.50%
2.00%
$3,614.00
$3,794.70
$3,984.44
$4,143.81
$4,309.56 $4,395.76
4.51%
5.00%
5.00%
4.00%
4.00%
2.00%
$2,570.00
$2,462.58
$2,414.79
$2,417.25
$2,433.85 $2,469.59
-2.95%
-4.18%
-1.94%
0.10%
0.69%
1.47%
$3,992.00
$4,091.80
$4,194.10
$4,298.95
$4,406.42 $4,516.58
1.09%
2.50%
2.50%
2.50%
2.50%
2.50%
$20,247.00 $21,293.38 $22,091.41 $23,002.92 $24,001.79 $24,895.95
3.00%
5.17%
3.75%
4.13%
4.34%
3.73%
Client
Logo
30%: On 12/12/14, ABT acquired
Veropharm, a leading Russian pharm;
huge growth in Russian market.
11%:Excluding foreign exchange
effect, we expect the sales to growth
by roughly 15% for future years; the
forex impact will be -8% for 2015, but
we assume ABT will hedge against it by
half.
39.41%:On 9/26/14, ABT acquired
CFR, more than doubles presence in
Latin America; then grows steady at a
lower rate than key emerging market.
4%: In 2013 and 2014, there was a
product recall in China; consumer
confidence has been restored by the
end of 2014.
We expected the long-term growth
rate is 3% each year considering
declining global GDP after 2019.
25
Discounted Cash Flow
Client
Logo
In 2014 and 2015, ABT aims to
streamline operation and increase
margin, the margin growth is
forecasted to be 3% mainly driven by
nutrition and diagnostic business.
In February 2015, ABT sold its
developed market Established
pharmaceutical business to Mylan,
lowering tax rate.
DCF calculation
EBIT
(-) Taxes
(+) Depreciation & Amortization
(-) Capital Expenditures
(-) Increase in NWC
Change in A/R
Change in Inventory
Change in A/P
Free Cash Flow
Period
PV Factor
Present Value of Free Cash Flow
Sum of Present Value of Free Cash Flows
Investment Team
$
2015E
2736.3
540.9
1767.4
1064.7
2016E
3813.8
753.9
1723.1
1104.6
2017E
4247.2
839.6
1794.2
1150.1
2018E
4671.7
923.5
1872.1
1200.1
2019E
5094.7
1007.1
1941.9
1244.8
1946.9
669.2
349.0
631.0
0.5
0.9578
604.4
207.4
124.1
53.0
3399.9
1.5
0.8787
2987.6
236.8
141.8
60.5
3733.6
2.5
0.8062
3009.9
259.5
155.4
66.3
4071.6
3.5
0.7396
3011.4
232.3
139.1
59.3
4472.5
4.5
0.6785
3034.8
12,648.2
Terminal Value
Perpetuity Growth rate
Terminal Value
PV Factor
Present Value of Terminal Value
Value per Share
Enterprise Value
(-) Net Debt
Equity Value
Fully diluted shares outstanding
Price per Share
$
3.00%
76778.5
0.6785
52,097.9
$
64746.1
-2399
67145.1
1512.0
44.41
26
Valuation
Client
Logo
Using a 30% weight on comparable companies and a 70% weight on the DCF, our
valuation came out to be $44.95
Investment Team
27
Final Recommendation
Client
Logo

We recommend to hold 400 shares of ABT

Stock price is moving above the 20-day moving average

The 2015 third quarter earnings beat analysts’ expectation

We value ABT stock to be fairly priced at $44.76 (as of 10/28/15)
Current
Price
$44.76
# of
Share
Market
Value
Cost
Gain &
%Gain
100
Shares
$4,476
$3,155
$1,321
+41.87%
200
Shares
$8,952
$4,994
$3,985
+79.26%
100
Shares
$4,476
$2,538
$1,938
+76.36%
28