Abbott Laboratories

Abbott Laboratories (NYSE: ABT) develops, manufactures, and sells health care products. It has a broad line of generic pharmaceutical products. It also deals in diagnostic products and medical devices.

Investment Rationale – BUY at USD 115.31

• The Group projects to report adjusted diluted EPS for FY21 from continuing operations of over US$5.00, representing 35% year-on-year growth.
• As of 31 March 2021, the pioneer credit rating agencies, Standard & Poor’s Corporation and Moody’s Investors Service, maintained a stable long-term debt rating of ‘A’ and ‘A3’, respectively.
• From a technical standpoint, 20-day EMA (USD 112.90) sustained below the current market price and can act as a resistance level for the stock. Adjacently, the MACD line has formed a positive crossover with the signal line.
• Since FY16, ABT has sound profitability margins as gross margin and net margin have remained above 55% and 5%, respectively.

Risk Assessments

• The need for Covid-19 tests is falling with the lockdown easing and progressive vaccine rollout. Subsequently, it can impact the Company’s earnings guidance.
• ABT’s cardiovascular and neuromodulation businesses can continue to be negatively impacted by the pandemic.

Recent News

CE Mark: On 28 June 2021, ABT received a CE Mark for its Panbio™ COVID-19 Antigen Self-Test. It is offered for sale direct-to-consumer for use in adults and children.

Financial Highlights for the quarter ended 31 March 2021 (as on 5 May 2021)

 (Source: Company Website)

• During Q1 FY21, ABT reported a 35.3% growth in sales, while the organic sales growth surged 32.9% year-on-year.
• Similarly, adjusted diluted EPS grew 103.1% year-on-year, as all four major businesses demonstrated robust sales growth.
• As on 31 March 2021, the Group reported US$8.1 billion in cash and cash equivalents (31 December 2020: US$6.8 billion), reflecting strong cash generation in Q1 FY21.

Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative) 

Conclusion

Following the strong sales growth in Q1 FY21, ABT expects significant growth in EPS for FY21. All its divisions reported decent organic revenue growth. Moreover, the Company declared its 389^th consecutive dividend in Q1 FY21.  The Group has increased its research and development expenses by 13.3% in Q1 FY21 versus Q1 FY20 to advance products in development. In a nutshell, ABT pays decent dividends, underpinned by strong fundamentals. It has enhanced liquidity and has stable debt ratings, ensuring adequate financial resources to pursue growth opportunities. The stock made a 52 week High and Low of USD 128.54 and USD 88.44, respectively. On the technical chart, the next important support level is at USD 98.45.

Based on revenue growth, liquidity boost, and favourable valuation conducted above, we have given a “BUY” stance on Abbott Laboratories at the current price of USD 115.31 (as on 30 June 2021, at 10:50 AM ET), with a lower double-digit upside potential based 6.32x EV/Sales (approx.) on FY21E Sales (approx.).

Del Taco Restaurants Inc

Founded in 1964, Del Taco Restaurants Inc (Nasdaq: TACO) offers Mexican and American favourite foods items, such as burritos and fries. It has around 600 restaurants across 16 states.

Investment Highlights – SPECULATIVE BUY at USD 9.90

• On 27 May 2021, TACO paid a quarterly cash dividend of US$0.04 per share, following the strong sales and profitability growth in Q1 FY21.
• TACO added 18 new restaurants in Q1 FY21 by signing two franchisee development agreements.
• From a technical standpoint, TACO’s stock price is nearly at the lower Bollinger Bands, reflecting an oversold scenario. The momentum oscillator 14-day RSI (42.29) substantiates the same.
• Since FY16, the Company has maintained a debt/equity ratio below 0.54x, reflecting a lower leverage position than the industry median.

Key Risks

• Due to the Covid-19 related uncertainties, TACO did not provide any financial guidance for FY21. However, it is estimating an increase in raw material and labour inflation.
• Inflationary market conditions can impact consumer spending. Moreover, with lockdown easing, pandemic induced at-home surge in consumption can wane.

Recent News

New Location: TACO expanded its footprint in Mexico with its 12^th location.

Q1 FY21 Financial Highlights (for three months ended 31 March 2021, as of 3 May 2021)

 (Source: Company website)

• The total revenue of Q1 FY21 represented 5.2% growth from the Q1 FY20, driven by strong sales of a system-wide comparable restaurant, franchised restaurants, and company-operated restaurants.
• Adjusted EBITDA also grew 33.4% year-on-year in Q1 FY21 with a significant decrease in operating expenses.
• Subsequently, the Company reported a net income of US$2.6 million in Q1 FY21 from a net loss of US$102.5 million in Q1 FY20.
• As of 31 March 2021, TACO reported availability of US$121.6 million in revolving credit facility, while the Company’s net debt totalled US$107.3 million.

Share Price Chart

 (Analysis done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative)

Conclusion

TACO has delivered solid financial and operational improvement in Q1 FY21. Although the trading environment remained challenging due to Covid-19 uncertainties (particularly for labour availability), the take-out and drive-through delivery channels are resiliently supporting the business, while the Company is managing its cost-effectively. The Group also has plans to open a dozen system-wide restaurants this year post-signing two new franchisee development agreements. The stock made a 52-week High and Low of USD 11.99 and USD 5.90, respectively. On the technical chart, the next important support level is at USD 8.32.

Based on the strong sales growth, business prospects, sustainable dividend policy and favourable valuation conducted above, we have given a "SPECULATIVE BUY" stance on Del Taco Restaurants Inc at the current market price of USD 9.90 (as of 30 June 2021, at 9:40 AM ET), with a lower double-digit upside potential based 0.85x EV/Sales (approx.) on FY21E Sales (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*Dividend Yield may vary as per the stock price movement.

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