YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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Recently, pharmaceutical companies have been left behind in a roaring market amidst fears of expiring patents and changing regulation. So far this year, the S&P 500 total return has been 4.38% whereas pharmaceuticals have had a return of only 1%. However, the general discounting of an entire group, such as pharmaceuticals, can lead to a few gems hidden in the rough. One such case is Abbott Laboratories (ABT), a company that we believe deserves to trade at a premium amongst the group.

Abbott’s stock price took a big hit in recent months with worries about the slowing growth rate of its most profitable drug, HUMIRA, which left investors wondering about the company’s future. Yet, relative to peers, Abbott has limited patent losses in the near term. Their current mix of major drugs such as HUMIRA, Thicor, and Trilipix all have patents until 2016. Additionally, Abbott’s strong pipeline and leading niche in cardiovascular disease drugs suggest that this is a strong company poised for a rebound.

HUMIRA has been Abbott’s primary growth prospect in recent years, seeing a 20% growth in 2009 and 15% in 2010. While some investors speculate that a slowing growth rate for HUMIRA will translate into a slowing growth rate for returns, other analysts suggest that HUMIRA’s low penetration rate in various diseases will cause its use to grow at double-digit rates for at least the next four years. Furthermore, Abbott seems to be moving away from its dependence in HUMIRA with new drugs and instruments for cardiovascular disease as well as new acquisitions Solvay Pharmaceuticals and Piramal Healthcare Solutions, which allow Abbott a foot in the door in the emerging markets overseas. All of these combined suggest that Abbott isn’t going to stop growing anytime soon.

In fact, Abbott has shown a lot of growth in the past couple decades. Actually, you can pick up ABT at the same price level it traded in 1998, except Abbott’s free cash flow and earnings have more than tripled since then! ABT’s dividend has continued to increase for the past 37 years to a juicy current yield of 3.8%.

One could easily find complaint that management hasn’t taken advantage of low stock prices to repurchase ABT stock. Adding to this lack of share repurchases, a recent layoff of 1,900 employees could spook investors into wondering if Abbott’s management knows where it is headed. However, the management team at ABT has a proven track record in utilizing its cash flow to grow via value-enhancing acquisitions. The recent acquisitions of Solvay and Piramal suggest that ABT managers are at it again, planning to expand globally in fast growing markets such as India. We believe they will continue to re-invest intelligently via skilled acquisitions. This makes the lack of share repurchases somewhat forgivable.

Overall, Abbott proves to be a good blue chip, a recession proof stock and a good business relative to other companies in its industry. Despite advantages like a high dividend yield, low P/E, high growth, and a strong set of current and upcoming drugs, ABT continues to trade in-line with its peers, making it look quite attractive to a patient buy and hold investor.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Mike Yacktman | January 28, 2011 | Permalink

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