Abbott Laboratories: A Contrarian Gem in a Lynch-Driven World

The investing world is full of contradictions—and right now, Abbott Laboratories (ABT) is one of the most intriguing. On one hand, Peter Lynch's fair value formula screams “avoid,” pricing the stock at a laughably low $23.08. On the other, discounted cash flow (DCF) models and peer comparisons suggest it's worth over $150. This is the kind of disconnect that makes me sit up and take notice. Let's dig in.

Peter Lynch's Puzzle: Why $23?

Lynch's approach is simple: a stock's fair value is tied to its earnings growth. For non-banks, he uses the 5-year EBITDA CAGR, capped at 25%, multiplied by the PEG ratio (typically 1) and trailing EPS. The problem? Abbott's 5-year EBITDA growth is negative—-2.5%—due to strategic moves that hurt near-term metrics.

The math is brutal. With a TTM EPS of $7.72 and that -2.5% EBITDA growth, Lynch's formula spits out a fair value of just $23.08. But here's the catch: Lynch's model is backward-looking. Abbott's EBITDA took a hit in 2023 after divesting its animal health and vision care divisions—moves that cut short-term profits but freed capital for high-growth areas like diagnostics and nutrition. Meanwhile, its 2024 EPS soared 134% as these restructuring efforts bore fruit.

The DCF Case: $151 and Counting

Discounted cash flow models tell a different story. Abbott's stable cash flows and diversified business—diagnostics, medical devices, and nutrition—generate predictable earnings. Analysts project 6.9% annual revenue growth over three years, backed by a 13% net margin. Plug those into a DCF, and the fair value jumps to $151, or roughly double its current price.

Peer Analysis: Why ABT is the Cheapest in Class

Comparing Abbott to peers like Johnson & Johnson (JNJ) and Pfizer (PFE) is illuminating:

• P/E Ratio: Abbott's P/E of 15.8 is 20% cheaper than JNJ's 19.4 and 30% below Pfizer's 22.3.
• EPS Growth: Abbott's 24.5% 3-year EPS growth trounces JNJ's -58% and Pfizer's -29%.
• Dividend Yield: A solid 1.8% vs. JNJ's 2.2%—not bad for a company with a 50-year dividend growth streak.

Why Analysts Are Wrong to Shrug Off ABT

Some analysts dismiss Abbott because its Q1 2025 EPS missed estimates by 2.6%. But this is noise. The real story is the long-term trajectory. Abbott's diagnostics division (think rapid tests and imaging) is booming, while its nutrition business (Ensure, Similac) offers steady cash flow. Even its medical devices unit, which faces pricing pressures, is expanding in emerging markets.

The Bottom Line: Buy the Contradiction

Lynch's formula is a relic here—it's blind to Abbott's strategic bets and misinterprets EBITDA swings as weakness, not restructuring. Meanwhile, DCF and peer data show this is a $150 stock trading at $77—a 50% discount.

Action to Take: Buy Abbott Laboratories now. The worst-case scenario? It trades up to Lynch's $23 target—which it already exceeded in 2020. The upside, though, is massive. Even a modest 10x P/E on its $7.72 EPS implies $77.20—half of the DCF's $151. That's a risk/reward ratio any investor should love.

Risks? Yes, But Manageable

• Regulatory headwinds: Medical device pricing is under scrutiny.
• Currency fluctuations: Abbott's global operations face forex risks.

But these are industry-wide issues. Abbott's scale and diversification give it an edge.

Final Take

This isn't just about numbers. It's about seeing through the noise. Peter Lynch's formula is great for steady growers, but Abbott is a turnaround story in disguise. Buy now—before the crowd catches on.

Disclosure: I own no positions in ABT, but this is a stock I'm watching closely.