Abbott Labs delivered a second-quarter earnings beat on Thursday, but the company’s ongoing litigation over its baby formula — plus softer guidance for the current quarter — is dragging down shares. We view the pullback as an opportunity. Revenue for the three months ended June 30 rose 4% year over year to $10.38 billion, slightly ahead of expectations, according to LSEG. On an organic basis, sales were up 9.3% versus the year-ago period (excluding Covid testing sales), also ahead of expectations. Earnings per share advanced over 5% to $1.14, which outpaced the Street’s estimate of $1.10 per share. Abbott Laboratories Why we own it : Abbott is a high-quality medtech company growing at a fast clip. The stock has been dealing with two overhangs: falling Covid testing sales and concerns that GLP-1 adoption will disrupt its leading continuous glucose monitor. As Abbott’s organic sales growth continues to shine, the market will realize both concerns are overblown. Competitors : Dexcom and Edwards Lifesciences Weight in Club portfolio : 2.89% Most recent buy : 5/29/2024 Initiated : Jan. 29, 2024 Bottom line This was a quality quarter from Abbott. The sell-off is partly a result of the ongoing necrotizing enterocolitis (NEC) lawsuits. Plaintiffs claim that Abbott’s formula for preterm infants used in neonatal intensive care units causes a potentially deadly bowel disease. Abbott argues that its products for premature infants are life-saving and called the lawsuits meritless. Nevertheless, the litigation is a major overhang for the stock. And there is a chance Abbott loses the first case, which started this month. The court in Missouri is considered plaintiff friendly. Abbott has already shed more than $30 billion in market cap since March, far exceeding the amount of any potentially settlement. This makes Thursday’s pullback a buying opportunity. Shares are even more attractive when we consider the company’s pipeline. Abbott recently received approval for two new over-the-counter (OTC) continuous glucose monitoring systems — Lingo and Libre Rio — based on the highly successful FreeStyle Libre. The OTC options may be new to the United States, but Abbott has been selling market-leading OTC glucose monitoring products internationally since the Libre launched 10 years ago. The FreeStyle Libre itself, which had 20% organic growth in the quarter, also still has plenty of runway for further growth. In the U.S., there are still about one-third of multiple daily injectors that aren’t using a continuous glucose monitor, and in internationally developed markets it’s around 50%. Moreover, as noted on the release, the company announced ten new growth opportunities in the first half of the year that are still in the R & D pipeline. “We continue to make good progress on our gross margin initiatives and more importantly our pipeline continues to be highly productive and thus we’re well-positioned to deliver strong results for the remainder of the year,” said CEO Robert Ford in his prepared remarks. Abbott’s soft guidance for the current quarter also seemed to hit the stock. Investors should focus instead on the upward revision to management’s full-year outlook for both top-line organic growth and earnings. The combination of Thursday’s strong results and immediate decline in share price is setting up a positive risk vs. reward setup. We acknowledge the upside may be limited until the NEC case is resolved, but the current levels provide a good entry point for patient investors. The roughly 2.2% dividend yield rewards those investors for that patience. We therefore reiterate our 1 rating and $130 price target. Guidance In addition to the strong headline results, management raised its outlook for the full year. The team now sees organic sales (ex-Covid testing) growing in the range of 9.5% to 10%, an increase from the previous range of 8.5% to 10%, and ahead of the 9.54% estimate at the midpoint. Management also raised its EPS forecast to between $4.61 and $4.71, up from the previous range of $4.55 to $4.70 per share. At the $4.66 per share midpoint, that represents a target above the $4.63 per share Wall Street was expecting. For the current (third) quarter, Abbott expects earnings to be in a range of $1.18 to $1.22 per share, below the Street’s $1.21 per share estimate at the midpoint. Quarterly commentary As shown in the chart above, companywide results were strong. The outperformances on sales and earnings were driven by robust organic growth and better-than-expected profitability at both the gross margin and pre-tax income levels. Under the hood, results were mixed. However, strength in the diagnostics and medical devices divisions more than offset the weakness in nutrition and established pharmaceuticals. On an organic basis, medical device sales rose 12.1%, followed by established pharmaceuticals (up 8.1%), and nutrition (up 7.5%). Diagnostics continues to be impacted by the decline in Covid-testing sales. On an organic basis, however, sales increased 5.9%. Medical Devices was the primary source of outperformance. Within the segment, slight misses in diabetes care ($1.648 billion vs. $1.651 billion expected) and vascular ($724 million vs $727 million expected) were made up for with big gains in rhythm management, electrophysiology, heart failure, structural heart, and neuromodulation. Within diabetes care, sales of glucose monitoring tool FreeStyle Libre reached $1.6 billion, representing an organic increase of 20.4% year over year. Within Diagnostics, a small miss in molecular was more than offset by strong results in core laboratory, point of care and rapid diagnostics. In Nutrition, strength in Abbott’s adult line was dragged down pediatrics. On the post-earnings call with investors, CEO Robert Ford growth was led by double-digit growth in international adult nutrition and U.S. pediatric nutrition, noting that the five-year compound annual growth rate of international adult nutrition is more than 10%. That reflects strong execution and “the impact from positive demographic trends that drive increasing demand for our Ensure and Glucerna brands.” Regarding the ongoing necrotizing enterocolitis (NEC) case, Abbott continues to defend its pre-term infant formula and human milk fortifier. Management once again took some time to discuss the company’s stance, noting that the plaintiff’s lawyers are “advancing a theory that is without merit or scientific support.” The team added, “The products and their ingredients have been reviewed and are deemed safe for use by regulators who have also reviewed their labels. There has been no increase in the rate of NEC, meaning these cases have not emerged in response to a trend or any new information.” It’s also important to note that while all medications have side effects, doctors must determine if a given course of treatment is appropriate and taking away that option is not without consequences of its own. “If these products were no longer available, physicians would be deprived of the vital food that is needed in the NICU. This would create a public health crisis affecting every state across this country,” the team added. Abbott has a strong argument, but there is still a chance it loses the lawsuit so we can’t dismiss this overhang. However, the market capitalization lost in recent months on these litigation concerns far exceeds the amount Abbott would likely pay to settle. There’s a disconnect between the stock price and underlying fundamentals that is providing an opportunity for patient investors. (Jim Cramer’s Charitable Trust is long ABT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Abbott Labs delivered a second-quarter earnings beat on Thursday, but the company’s ongoing litigation over its baby formula — plus softer guidance for the current quarter — is dragging down shares. We view the pullback as an opportunity.