• Wondering whether Abbott Laboratories at US$87.78 is starting to look interesting on valuation, or if the market still sees more downside risk than upside.
• The stock is up 0.4% over the last week but down 1.9% over the last 30 days, with year to date and 1 year returns declining 29.3% and 32.9% respectively, which puts recent moves in sharp contrast to longer term performance.
• These returns have kept Abbott Laboratories in focus alongside ongoing sector wide interest in healthcare companies, as investors reassess what they are willing to pay for stable earnings profiles. While there has not been a single headline driving the share price on its own, the stock continues to feature in broader discussions about defensiveness and pricing power in the US healthcare space.
• Against that backdrop, Abbott Laboratories scores a 5/6 valuation check result. This sets up a closer look at how different valuation methods stack up, and it also hints at an even more helpful way to interpret value that will be covered at the end of this article.

Approach 1: Abbott Laboratories Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes projected future cash flows that a company is expected to generate and discounts them back to today to estimate what those cash flows might be worth now.

For Abbott Laboratories, the model used is a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is about $7.13b. Analyst estimates and subsequent extrapolations point to free cash flow of about $10.39b by 2028, with a set of longer term projections running out to 2035, all expressed in dollars and then discounted to present value.

Pulling these cash flows together, the DCF model suggests an intrinsic value of about $135.45 per share, compared with the recent share price of $87.78. That implies the stock is trading at a 35.2% discount to this estimate of fair value, which screens as materially undervalued on this methodology.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Abbott Laboratories is undervalued by 35.2%. Track this in your watchlist or portfolio, or discover 47 more high quality undervalued stocks.

Approach 2: Abbott Laboratories Price vs Earnings

For profitable companies, the P/E ratio is a straightforward way to connect what you pay for the stock with the earnings the business is currently generating. It helps you gauge how many dollars investors are willing to pay today for each dollar of annual earnings.

What counts as a “normal” P/E depends on how quickly earnings are expected to grow and how risky those earnings appear. Higher growth or lower perceived risk can justify a higher P/E, while slower growth or higher risk usually supports a lower P/E.

Abbott Laboratories currently trades on a P/E of 24.46x. That sits close to the Medical Equipment industry average of about 24.23x and below the peer group average of 31.00x. Simply Wall St also calculates a Fair Ratio of 29.73x, which is an estimate of the P/E that might be appropriate after adjusting for factors such as earnings growth, profit margins, risk profile, industry and market cap.

This Fair Ratio can be more informative than simple peer or industry comparisons because it attempts to tailor the benchmark to the specific characteristics of Abbott Laboratories. With the current P/E below the Fair Ratio, the stock screens as undervalued on this metric.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Abbott Laboratories Narrative

Earlier it was mentioned that there is an even better way to understand valuation, so this is where Narratives come in as a simple way for you to link the Abbott Laboratories story to a financial forecast and then to a fair value that you can compare with the current share price.

A Narrative is your own clear story for the stock, where you set assumptions for future revenue, earnings and profit margins, then see how those inputs translate into an estimated fair value instead of just relying on headline multiples.

On Simply Wall St, used by millions of investors, Narratives are available on the Community page and give you an accessible tool that updates when new information such as earnings or news is added. This means your fair value view keeps moving with the facts.

This means two investors looking at Abbott Laboratories can each build a Narrative with different expectations for growth, profitability or required return and end up with very different fair values. This helps each of them decide whether the current US$87.78 price looks attractive, fully priced or expensive based on their own story.

Do you think there's more to the story for Abbott Laboratories? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.