Oversold and Overextended, Abbott Laboratories is a Great Buy

Key Points

• Abbott Laboratories is down 35% from its peak and offering an excellent entry for income investors. 
• Q3 results and guidance are favorable to higher share prices, and the market is rebounding. 
• The analysts see this stock rising 10% at the low end of their target range. 

Abbott Laboratories NYSE: ABT share price has trended lower for nearly 2 years, but that trend is over. The impact of COVID on sales and the post-COVID letdown were cause enough for the market to sell, but not now; the market is oversold and overextended with normalization at hand. Normalization, a buzzword that can be applied to most industries today, means steadying sales of COVID supplies offset by core business growth and, more importantly, a return to growth for this Dividend King in 2024. 

Abbott Laboratories Smokes The Estimates, No Surprise There

Abbott Laboratories had a solid quarter, with strength in all segments contributing to results. The company produced $10.14 billion in net revenue to beat the consensus estimate by 325 basis points, which is no surprise. The company tends to outperform regularly; the only question is how much, and Q3’s performance is above average for F2023.

Revenue fell by 2.5% compared to last year due to COVID-19 sales, but a much larger contraction was expected. Medical Devices led segmentally with a gain of 17.1%, followed by a 15% increase in Nutrition and a 2.3% increase in Established Pharma. Ex-COVID, all segments grew on an organic basis, and systemwide sales are up 13.8%. 

The margin was also solid. The company’s adjusted and GAAP profit margin increased modestly to drive outperformance on the bottom line above what’s seen in the top-line result. The adjusted $1.14 is down less than 100 bps YOY and beat consensus by 360 basis points to reveal operational efficiency. It is great news for investors because of its impact on the dividend outlook and market sentiment. 

Guidance is also favorable to investors. The company reiterated its outlook for full-year organic growth in the low-double-digits compared to Q3s 13.8%. That is compounded by narrower guidance that resulted in a higher midpoint than previously stated. The new EPS range is $4.42 to $4.46 compared to the $4.40 Marketbeat.com consensus, and it may still be cautious. The strength in sales is driven by increasing procedure volume following the pandemic slowdown, which has yet to play out. 

Analysts See Highly Valued Abbott Laboratories Moving Higher 

Abbott is arguably a highly-valued and overvalued stock compared to competitors like Johnson & Johnson NYSE: JNJ, but there are differences, and Abbott is worth every penny. The primary difference is JNJs exposure to pharmaceutical discovery, which adds an element of risk.

Regarding the value and yield combination, the 35% discount to peak prices has the valuation and yield in the best shape in years. The stock yields about 2.2% at these levels compared to 2.0% or lower over the past 2 years, and the distribution is growing. Abbott still pays less than 50% of earnings after 51 consecutive annual increases and can continue to increase for several more decades. 

And the analysts are bullish on this stock. The consensus rating has been steady at Moderate Buy for years, with a price target that is down compared to last year but steady since Q2. The critical details are that consensus implied about 30% upside for the market, and the low price target of $102 implies this stock is deeply undervalued with at least a 10% upside. 

The Technical Outlook: Abbott Laboratories is at the Bottom 

The technical outlook favored a rebound in ABT shares going into the Q3 report, and the report provided the expected catalyst. The market is up more than 2.0% in early trading, confirming support at the critical $92.50 level. That level marks a multiyear low and puts the stock in oversold condition with diverging indicators. The divergence is small but present in the MACD histogram and indicates potential for rebound confirmed by the post-release action. Assuming the market follows through on this signal, shares of ABT should continue to rebound and may move up to the $103 to $105 region before hitting significant resistance.