Attendees walk past the Abbott booth during CES 2024 at the Las Vegas Convention Center on January 10, 2024 in Las Vegas, Nevada.
Ethan Miller | fake images
Shortly after the opening bell, we will purchase 140 shares of Abbott Laboratories at approximately $112. Following the deal, Jim Cramer's Charitable Trust will own 700 shares of ABT, increasing our portfolio weighting from 1.95% to 2.42%.
We are buying more Abbott Laboratories in its recent weakness as we continue to believe that the market is overestimating the risk of infant formula litigation.
Abbott's shares began to fall on Friday after a jury ordered Reckitt Benckiser pay $60 million to a plaintiff whose premature baby died of necrotizing enterocolitis, also known as NEC, after being fed Reckitt's Enfamil formula. Abbott was not involved in this case.
Whenever headlines like this appear, the market tends to shoot first and ask questions later. In this example, the market analyzed Abbott's approximately 1,000 pending lawsuits and multiplied them by the $60 million payment to a plaintiff (seeking a lower figure of $25 million) and calculated that Abbott's exposure at worst In most cases it could be up to $60. billion.
Here's Abbott's official statement: “Abbott has spent decades researching, developing, testing and producing formulas and fortifiers for premature babies, and countless babies have benefited greatly from these products. These accusations are baseless and advance a theory promoted by the plaintiffs' attorneys rather than the medical community, which considers these products part of the standard of care for premature babies.”
There are a few key things we should know from this statement. First, there is no scientific data showing that Abbott's formula causes NEC even though pending lawsuits allege that these premature babies developed NEC as a result of the infant formula. Second, premature babies don't have many feeding options beyond Abbott and Reckitt products. It is the standard of care because there is a lack of alternatives. This is a completely different situation than Johnson and JohnsonThe talc litigation.
Since the news broke, Abbott's stock price has fallen about 6%, compared with the S&P 500's rise of 1.4%, and it has lost about $14 billion in market capitalization. We are not lawyers, but this decrease seems too excessive based on the facts surrounding the situation.
Abbott Labs stock performance over the past month.
Should Abbott attempt to settle all outstanding lawsuits, the final figure would likely be well below the market capitalization the company has lost, making this recent pullback a buying opportunity. We also bought some Abbott stock on Friday.
Wall Street analysts have weighed in on the matter.
JPMorgan said last week that it believes “the final figure would likely be substantially less than the implied $60 billion…we would put the figure at a small fraction, at best, many years from now.” “.
In Evercore ISI's scenario analysis based on historical context, analysts believe a deal could be well below $250 million based on current pending cases. Wells Fargo is in similar territory. The firm estimated a potential settlement of approximately $280 million based on its assumptions about recent litigation settlement efforts.
In the meantime, Jefferies analysts wrote, “the final outcome is difficult to determine, but will most likely result in a manageable fine for ABT.”
We don't want to take the situation lightly because NEC is terrible. And we can't ignore the problem this news has created around Abbott Labs, a high-quality healthcare company that has much more to offer beyond baby formula. It could persist for some time. However, when we compare the billions in market cap lost over the past week to what could be a deal, our conclusion is that this sell-off is overblown.
(Jim Cramer's Charitable Trust is long ABT. See here for a complete list of actions.)
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