Abbott Labs ABT reported decent first-quarter performance, with top-line results falling slightly short of our estimates but profitability improved, consistent with our expectations. We plan to leave our fair value estimate unchanged for now at $34 per share. As in past quarters, we saw strength in several key areas related to Abbott’s narrow moat, which includes its presence and infrastructure in the emerging markets.
Nutritionals—one of the moatiest parts of Abbott, in our opinion–continues to post impressive growth in the high single digits, thanks to strong international demand, and a plethora of new product introductions. Abbott also saw decent performance in it diagnostic segment with 6% revenue growth, as the firm rolled out its next-generation core diagnostic equipment. Unfortunately, Abbott’s device segment reported a 3% revenue decline, fueled by softness in PCI procedures.
We also suspect that rival Medtronic’s MDT Resolute stent has been able to eat into Abbott’s Xience market share. We were heartened to see more incremental progress in Abbott’s plan to improve profitability, which remains a critical factor in our valuation. Operating margin in the first quarter increased 350 basis points over estimated operating margin in 2010 at Abbott. This puts the firm on track to meet our bottom-line projections for the full year. If Abbott continues to squeeze out expenses from its bloated cost structure over the next couple of quarters, we may increase our estimates for cost savings.
We note that, despite Abbott’s progress in bringing down costs, the gap between its operating margin and those of its competitors remains substantial. We still think there is plenty of room for further improvement on the P&L for Abbott.
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