Is Abbott Laboratories planning to sell off its nutritional wing?
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Is Abbott Laboratories planning to sell off its nutritional wing?

Medical products supplier Abbott Laboratories has a problem: its nutritional products segment, which makes Similac infant formula amongst other things, is not performing the way that the company would like. Originally billed as a growth engine for the Chicago-based healthcare business, nutritionals have become the weak spot in an otherwise successful product offering: while the company’s other business units all saw growth between 3% and 4% in the last quarter, nutritionals declines by 0.6%.

Abbott’s share price is up by 26% in 2017 so far

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SOURCE: Yahoo Finance

According to Abbott’s CEO Miles White, the segment’s difficulty is down to a supply glut in China that’s been caused by an impending regulatory crackdown. This is not the first time that China ahs posed a problem for the business, and investors might be beginning to wonder whether nutritionals are worth the hassle.

Certainly, White himself seems to be souring over their future prospects. In the first quarter, he said: “I love the nutrition business.” In the last quarter, however, when discussing the company’s product lineup, he singled out nutritionals for a talking down: “the one that’s got my attention from a longer-term perspective is nutrition – particularly internationally – and what I’ve seen there is a slowing.”

Abbott’s nutrition business sits apart, conceptually, from its other segments. The company is best known for producing serious diagnostic equipment and devices, like medical testing kits and heart valves. Nutritionals, in contrast, is more like a consumer product.

Debbie Wang, a Morningstar analyst, thinks that the company should consider a sale: “the question becomes do they want to stick around for the long term in nutritionals? If not, then sell it.” The answer to that question, however, may well depend on China.

At the moment, despite its slowing growth, the nutritionals business is still a strong cash flow generator. But the Chinese government has made it pretty clear that it doesn’t like foreign multinationals dominating the Chinese baby formula market, and as a result it has made it nearly impossible for Abbott to hit its own internal goals. Unless that changes, a sale could be in the offing.

Disclosure

Dominion holds Abbott Laboratories in its Global Trends Managed Fund.


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