Friday, October 2, 2009

Abbott Laboratories Review

I make it a fairly regular habit of having a look at companies that care about their dividend. The dividend aristocrat list has always been a good starting place for me as these stocks have a proven track record of tailoring themselves to the dividend investor. Abbott Labs appears in the 2009 version of this list.

To put a full review of Abbott would make for a long post, and not a particularly interesting one, so I'll instead restrict myself to looking at a few key elements from the company's fundementals. Perhaps this will help to add to the research you have already performed on Abbott or suggest some alternative ways that you can look at other companies.

Description

Abbott Laboratories is engaged in the discovery, development, manufacture, and sale of a range of health care products. It operates through four business segments: Pharmaceutical Products, Nutritional Products, Diagnostic Products, and Vascular Products. The Pharmaceutical Products segment’s products include a line of adult and pediatric pharmaceuticals manufactured, marketed and sold worldwide. The Diagnostic Products segment’s products include diagnostic systems and tests manufactured, marketed and sold worldwide to blood banks, hospitals, commercial laboratories. The Nutritional Products segment’s products include a line of pediatric and adult nutritional products manufactured, marketed, and sold worldwide. The Vascular Products segment’s products include a line of coronary, endovascular, and vessel closure devices manufactured, marketed and sold worldwide.

There are quite a few interesting things that can be found in Abbott's books so lets have a look.

Growth of Intangibles

I have had several rants about intangibles. They allow a business to inflate it's books by creating value with little or no checks placed on the validity of the numbers they provide.


Unfortunately Abbott has decided to embrace using intangibles, but we will come back to this later.

Inventory Management

By watching the growth of inventory we can gain a fairly good sense of direction of the business. In Abbott's case there is a pronounced rise in their inventory over the last several years.
Numbers in this form can be deceiving, looking at this number in its raw form one quickly forgets that the rest of the company has grown also. To create a perspective we can also look at is a common balance sheet view of the inventory. A common balance sheet takes all line items in the balance sheet and represents them as a percentage to the total assets in the business. By taking these numbers and graphing them we get the following picture.
This graph tells us a slightly different story, here we see that the inventory, when looked at in comparison to the total assets in the business, has actually stayed in a fairly tight range and is actually trending down. This is a strongly positive sign as it indicates that the company has a good understanding of its product's demand and is not merely producing product for product's sake.

Now getting back to the intangibles I have mentioned before that I strongly believe that a good investor should take the time to remove the intangibles from the balance sheet and then try to find reasons to add the intangibles back in. Intangibles may or may not be worth what the company thinks they are.

Looking at the common balance sheet inventory with intangibles removed tells a similar story to our earlier graphs. Interestingly enough though it does spike the recent inventory numbers, which calls into question what direction the business is heading in over the next few years, is there a reason why recent inventory should be shooting up?

Accounts Receivable

Accounts receivable are critical to a companies ongoing health any length of back flips can't conceal when a company simply stops generating money.
Abbott's receivables are increasing at an investor friendly rate, though the last point shows them somewhat flattening.

In my opinion one of the most useful charts shows Accounts Receivables as compared to Accounts Payable. The story we are trying to get out of this is a sense of what it costs to make money. If payables are increasing faster than receivables then we know that it is costing more and more to make money. If payables are decreasing in relation to receivables then it is costing less to make money every year.
We see investor friendly numbers here as it appears they are finding ways of creating more revenue out of less expense.

In the same way as we looked at inventory in a common form it is also useful to look at the accounts receivable in the same way. We take accounts receivable and show it as a percentage of the total assets.
A sudden decrease in this chart would show us that they are having to squeeze money out of other places in order to make solid revenue numbers- which we don't like as those means can be temporary. The stability of this chart shows us that receivables are still a significant part of Abbot's business foundation. As with the other line items it is worthwhile to examine this element with the extraction of intangibles.
Interestingly enough the removal of intangibles in this case tells a less stable story, but certainly one with a stronger recent history.

The final chart we will look at is the ROC or rate of change of accounts receivables. This chart looks at the change from each previous year that the accounts recievable achieved.The fact that all but one of the numbers is positive indicates that every year they manage to outdo the accounts receivables from the previous year. It is not as much of a linear progression as I would like but the consistent positive numbers is certainly a good turn.

Conclusion

As I said at the outset this analysis certainly doesn't represent all of the facts about Abbott but may suggest some alternative ways of looking at data that you can use in your own analysis. So what did you think?

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