Why Abbott Laboratories Stock Looks Ridiculously Overpriced

Abbott Laboratories (NYSE: ABT) has had a volatile couple of years. It benefited from COVID-related tests boosting its sales, but last year it ran into manufacturing issues that affected its baby formula production and hurt sales in its nutritional segment. The business is now getting back to normal, but the problem is that its valuation still needs to come down significantly before it's a worthwhile buy.

The business is improving, but at a modest pace

On April 19, Abbott released its first-quarter earnings numbers. Total revenue of $9.7 billion for the period ending March 31 was down 18% year over year, but that was largely due to the decline in its diagnostics business, where demand for COVID-19 tests has dropped off significantly -- sales in that segment were down close to 50%.

One positive is that the nutrition business was up 3.8% as the company recovers from headwinds last year due to recalls and manufacturing stoppages related to its baby formula products. The company says it has been making "good progress recovering market share" in its pediatric nutrition business.

But the downside is that the company's growth rate hasn't been all that impressive, as its pharmaceuticals business was up by just 3.7%. And while its medical device segment grew by 8.5%, that was with some incredibly strong numbers from its diabetes care business, where sales growth was 16.6%. The company's revenue from its glucose monitoring devices under the FreeStyle Libre brand totaled $1.2 billion and generated growth of 50% in the U.S.

Even despite some fast-growing products, Abbott's business hasn't been growing at a significant enough rate to justify the company's valuation. And the problem is that this has historically been a modestly growing business.

ABT Revenue (Quarterly YoY Growth) Chart

ABT Revenue (Quarterly YoY Growth) data by YCharts

The stock is trading at a rich valuation

This year, Abbott is projecting that its diluted earnings per share will fall within a range of $3.05 to $3.25. At the midpoint, $3.15, that would put it at a price-earnings ratio of 35 based on its current share price of around $111. That's a high multiple when you consider that the average healthcare stock trades at 23 times its trailing earnings and 18 times future estimated profits. So unless Abbott's price comes down significantly over the next 12 months, this could be an expensive stock to hold onto right now.

ABT PE Ratio Chart

ABT PE Ratio data by YCharts

Its valuation has been creeping down amid the current bear market, and investors should remember that this valuation was achieved while the business benefited from strong demand for COVID tests. Now, with operations moving in a more normal range, profits won't be as high, which could make its valuation look even worse.

Is Abbott Labs stock a buy?

Abbott Laboratories is expecting high-single-digit growth this year (excluding COVID-19 tests), but that isn't enough of a reason to justify its rich valuation. For a company with such a tame growth rate, investors should be paying a more reasonable price for Abbott's stock.

That's why unless shares of Abbott drop significantly in the near future, investors are better off avoiding the stock right now. Even Abbott's modest dividend yield of 1.9% isn't enough of a reason to buy the stock as there is no shortage of high-yielding options out there to choose from today.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Abbott Laboratories. The Motley Fool has a disclosure policy.