Abbott's Q4 Earnings Contain Surprises as Company Reverses Course on Staff Cuts

Abbott Labs reported its Q4 earnings today and the news was good: revenues up 10 percent to $7.9 billion; net income up 28 percent to $1.54 billion. The results came after a stellar Q3.

But despite the good news, one analyst still doesn’t quite trust Abbott. Citigroup’s Matthew Dodds told CNN that he has a problem with Abbott’s “earnings quality”:

For the last four years Abbott has taken a litany of gains or charges every quarter. It’s very aggressive accounting. Real underlying earnings growth is quite a bit lower than reported numbers, and that will catch up to them. I can’t point to a quarter or year they’ll run out. But it’s a continual steamroller.

BNET looked at Abbott’s one-time charges going back to Q1 2006.* The company has taken gains and charges totalling $864 million in that period. Over two years, that’s 1 percent of sales. Not too bad. There were some nasty surprises in there — in Q1 2007 the company took a $124 million charge that was about 2 percent of sales. The charge was for a loss on Abbott’s investment in Boston Scientific common stock.

Abbott’s latest results are similarly lumpy. Behind the headlines there was a big increase in sales and marketing expenses — they were up 22.2 percent to $2.3 billion. And there was a big decline in manufacturing costs, increasing its gross profit.

The company said its sales costs rose because it did nine new product launches last year. Fair enough — but all those increased costs are ruining Abbott’s efficiency. Last quarter, it was squeezing $3.63 for every dollar it spent on sales reps et al. Now it’s only getting $3.46. Those launches appear to be crushing its current results.

And if the launches are successful, Abbott will need to ramp up its manufacturing — and that nice gross profit margin will disappear like scotch mist.

In sum, everything that Abbott did right in Q3 — lowered staff costs on higher revenues — appears to be undone in Q4. (At least they’re hiring, though.)

Here’s a chart showing how Abbott’s productivity has gone out of whack. The lines show the percentage growth in revenues and gross profit per $1 spent on sales and marketing in the quarter. Ideally, companies want the lines to move together, upward, and above the 0 percent line. But as you can see, Abbott’s wildly varying sales and manufacturing expenses have those lines wobbling all over the place.

* This item has been corrected from its original version, which contained an inaccurate description of the charges Abbot had recorded. The author regrets the error.