Streetwise

Lauren Rudd

Sunday, January 15, 2012

Keep Protestations in Proper Proportion

Earnings season is upon us and you can therefore look forward to being inundated with an onslaught of carefully worded hyperbole designed to distract your attention from any unpleasantness. As you listen to the various forecasts, remember that rose colored glasses, combined with a dollop of wishful thinking, are a precursor to disaster.

That doesn’t mean to disregard the various protestations, just keep them in proper perspective, while remembering that the Street’s analysts have a herd mentality and that their opinions may not coincide with your own.

Here is another bit of advice, do not rely on anyone to part the Red Sea and guide you to the Promised Land of high returns. It is your responsibility to separate the wheat from the chaff. Furthermore, the past will not predict the future.

So do you ignore historical data? No, again you simply need to put it in proper perspective. Unfortunately, whenever there is an increase in market ebullience, there is also a tendency to add credence to boisterous prognosticators. That is a mistake. Never take the opinions you hear or read (including mine) to be the gospel.

And never let anyone pressure you into making a quick investment decision. A person selling an investment is unequivocally biased. It does not matter how many letters they have after their name, how sincere they appear, or how long you have known them, they sell for a living. You need to become confident in your own judgment.

A no nonsense investment strategy will help you get through what will likely be at least another year of economic turmoil. Furthermore, virtually everyone can learn to select quality investments that will stand up to the test of time. Need some place to start; you might want to consider Abbott Labs.

Abbott engages in the discovery, development, manufacture, and sale of health care products worldwide. Its business is divided into four groupings: pharmaceutical, diagnostic, nutritional, and vascular products. It employs nearly 90,000 people and markets products in over 130 countries.

The company has increased its dividend for 39 consecutive years and was titled a leading dividend stock by Barron’s. Unfortunately, past earnings and share price performance have been mediocre in the past. However, there are some major changes in the offing. Abbott has announced that it plans to separate into two publicly traded companies, one being a diversified medical products company, with the other specializing in research-based pharmaceuticals.

The diversified medical products company will consist of Abbott's existing medical products portfolio, including its branded generic pharmaceuticals, medical devices, diagnostic and nutritional businesses, and will retain the Abbott name.

The research-based pharmaceutical company will include Abbott's current portfolio of proprietary pharmaceuticals and biologics and will be named later. So the question then is whether this will be good for shareholders and would I suggest holding the shares and seeing the transaction through? My answer at this time is yes.

The intrinsic value of the shares using a discounted earnings approach, with a 12 percent discount rate and a conservative earnings growth rate of 9.7 percent, produces an intrinsic value of $59 per share. A more conservative free cash flow to the firm approach produces an intrinsic value of $135 per share.

The shares recently closed at $55.42 against my year ago 12-month target of $54 for a realized capital gain of 17.40 percent when compared to the price a year ago of $47.20. My earnings estimate for fiscal 2010 was $4.18 per share, with the actual number coming in at $4.17, leaving me a penny light.