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Looking to Add to a Pharma Holding

Next week, we expect to hear details on this health care firm's growth strategy.
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We like the Abbott Laboratories (ABT) story for 2013, and we are looking for any weakness in the shares to add to this position. The company will speak to investors next Tuesday at the JPMorgan conference, and management will outline its growth strategy for 2013 and its longer-term goals. Specifically, it will tell us how it will get to double-digit revenue growth, continue to post margin expansion and use its cash.

On the revenue side, the company is in excellent position to grow at levels far above its peers because of its strong positioning in the emerging markets, where it commands two times the exposure of its peers (40% of its total revenue, vs. 10%-20% for the group), led by markets in China and India. Of all its product lines, consumer nutritionals will be the largest segment at the company, and its above-average growth -- an expected 35% compound annual growth rate over the next three years -- will be heavily influenced by the demographic changes in China, which continue to improve.

We expect to hear about new products, generic trends and the overall competitive environment internationally at the meeting. On margins, this is what CEO Miles White has excelled at -- keeping costs low, maintaining strong pricing and producing operating leverage. Company guidance has been for margin expansion in the range of 200 to 400 basis points, and the leverage is big to the bottom line, as every 100 basis points of upside equals $0.15 a share.

What's interesting is that although consumer nutritionals is the fastest-growing segment at the company, it also has margins that are way below its industry peers, to the tune of 500 basis points, so there is clear upside opportunity. Diagnostics should also be another driver to margin improvement. With annual free cash flow of $3 billion, we see further dividend increases, but management has preferred to buy its shares instead -- either one would be a positive. Mergers and acquisitions will most certainly continue -- this is another one of White's preferences. Shares trade at 17x forward estimates, which is admittedly not cheap relative to Abbott's peers, but since Abbott has superior top and bottom lines, it is deserved. This is on our watch list to add on weakness.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long ABT.

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