Abbott Laboratories (ABT -0.74%) posted its latest earnings numbers last month, and there's reason to be optimistic about the business. Although a drop in COVID testing means sales are down overall, it's generating positive growth in other areas of its business, and analysts have been upgrading the stock. And yet, its share price is still down around 1% this year. Is Abbott's stock a good buy right now?
The company increases its forecast, again
Abbott Laboratories posted its second-quarter results in July, and for the second time this year, it has raised its outlook for 2023. Excluding COVID-19 testing sales, the company is now projecting low double-digit organic sales growth for the year. A quarter earlier, it was forecasting at least high single-digit growth, which was slightly better than its original forecast for the year.
That's an impressive growth rate given Abbott's history. While it did post strong results in recent years due to COVID testing, a double-digit growth rate certainly isn't typical for the business.
ABT Revenue (Quarterly YoY Growth) data by YCharts
Its medical device business is key to its growth
Abbott's total revenue for the period ended June 30 was just under $10 billion and declined 11% year over year. In diagnostics, where COVID-19 testing inflated its numbers a year ago, sales of $2.3 billion were down 46% year over year and weighed down the top line.
But one area that has been strong and has helped offset those losses is Abbott's medical device business, which in Q2 grew at a rate of nearly 14% to just under $4.3 billion. One particular growth area that looks promising for Abbott is in diabetes care, where sales rose by 19% year over year. Earlier this year, the U.S. Food and Drug Administration cleared the company's continuous glucose monitoring device, the Freestyle Libre 3, which is smaller and less noticeable than the G6 from rival DexCom.
In April, Abbott also completed its acquisition of Cardiovascular Systems, which could lead to more growth in its medical device business. The acquired company has a leading atherectomy system which is used in treating coronary artery disease.
Abbott also posted decent results in its nutrition and pharmaceutical segments, which reported 6% and 5% revenue growth, respectively.
Is Abbott's stock cheap?
After the release of its latest earnings report, Abbott's stock benefited from multiple upgrades from analysts, with one price target being set as high as $132. That's higher than the consensus price target of $120, which implies an upside of over 10% from where the healthcare stock trades at today.
Investors are currently paying a multiple of 24 times the company's estimated future earnings. That's a bit steep given that the healthcare industry average is less than 19. Unless investors are bullish about a strong recovery in healthcare or the Libre 3 device, it could be too expensive a valuation for a business that normally doesn't generate a high rate of growth.
Should you buy Abbott's stock?
If you're a growth investor, then this healthcare stock is a hard pass. While Abbott's business is showing some good growth this year, that's not a pattern I would expect to continue. It's benefiting from a rebound in the healthcare industry with operations returning to normal. There has also been an uptick in the number of surgeries, which can help increase demand for medical devices. As those tailwinds subside, it could be back to more modest single-digit growth for Abbott.
For dividend investors, however, Abbott can make for a more attractive buy as it pays an above-average dividend yield of 1.9% (the S&P 500 average is around 1.5%). It is also a Dividend King, with a solid track record for dividend growth. If you're a long-term investor who's after a safe payout, Abbott can be an excellent investment buy and hold as the recurring income you generate from the stock is likely to rise over time. It can also provide some great stability with its diverse operating segments.
Although it might not generate amazing returns for investors, Abbott can be a solid pillar to build your portfolio around, particularly if you're risk-averse and want a reliable dividend.
