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NYSE:ABTChris Zakhem | Mengxi (Vivian) Wang | Le Huong Hoang | Ziqi (Kay) Mai

October 29, 2015

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Team Introduction

Chris ZakhemInvestment ManagerB.S. in Finance

Le Huong HoangInvestment ManagerMasters of Finance

Vivian WangInvestment ManagerB.S. in Finance and Accountancy

Ziqi MaiInvestment ManagerMasters of Finance

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Agenda

Macroeconomic Overview

Company Overview

Stock Market Overview

Financial Analysis

Comparable Companies

Financial Projections

Valuation

Recommendation

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http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf

The decreasing birthrate will potential decrease the pediatric segments but the increase in the aging population will bolster sales

Macroeconomic OverviewPopulation

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http://www.eiu.com/home.aspx

The GDP growth rate in the U.S. and the world will increase until 2018 then decrease slightly in 2019

Macroeconomic OverviewGross Domestic Product

Key indicator 2014 2015 2016 2017 2018 2019

GDP growth rate 2.4 2.5 2.4 2.4 2.6 1.4

Consumer price inflation 1.6 0.3 1.7 2.3 2.5 2Federal Government Budget Balance (% of GDP) -2.8 -2.7 -2.4 -2.3 -2.2 -2.4

Exchange rate ¥:US 105.9 122.1 124.4 124 122 122

World GDP growth 2.3 2.4 2.8 2.8 2.9 2.5

World Trade Growth 3 3.7 5 5.5 5.6 5.6

US Brazil Russia India China World

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-2

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4

6

8

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GDP Growth, Projected 2015-2019

2015 2016 2017 2018 2019

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http://www.iahc.com; https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/proj2014.pdf

The U.S. health spending is expected to increase with a growth rate of 5.8%

Macroeconomic OverviewU.S. Health Spending

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There is an increase in pharmaceutical sales worldwide

Macroeconomic OverviewPharmaceutical Industry

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http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/assets/pwc-pharma-success-strategies.pdf

There is a rising demand for medicine in the emerging markets, but the strong dollar negatively affects the international sales

Macroeconomic OverviewDemand for medicine in the emerging market

2014 2015 2016 2017 2018 201995

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105

110

115

120

125

130

Exchange rate ¥:US$ (av)

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Abbott 2014 10-K, pgs. 1-4

Abbott has four main segments with multiple sub-segments within them

Company OverviewSegments

Products

Established Pharmaceutical Products

Key Emerging Markets

Other Emerging Market

Diagnostic Products

Immunochemistry

Nutritional Products

International Pediatric Nutritionals

U.S. Pediatric Nutritionals

International Adult Nutritionals

U.S. Adult Nutritionals

Vascular Products/Medical Devices

Endovascular

Coronary Deices

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Abbott 2014 10-K pg. 47; 2015 Q3 8-K pgs. 2-6

9 month income in 2015 includes $1,752M gain on the sale of the developed markets branded generics pharmaceuticals and animal health businesses to Mylan and Zoetis in

February 2015.

Company OverviewRevenue Outlook

(In Millions) 2013 2014 9M 2015

NET SALES 21,848 20,247 15,217

NET INCOME 2,383 2,284 3,656*

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Abbott 2014 10-K pg. 29; 2015 Q3 8-K pgs. 2-6

Company OverviewRevenue Breakdown

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Abbott 2014 10-K pg. 23

Company OverviewRevenue Breakdown

U.S30%

International70%

% of Total Sales

Geography

50% of total sales from Emerging Market

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Abbott 2014 10-K pgs. 1-4

Company OverviewEstablished Pharmaceutical Segment

Product Gastroenterology products, women's health products, cardiovascular and metabolic products, pain and central nervous system products, respiratory drugs and vaccines

Market Outside United State

Consumer Wholesalers, distributors, government agencies, health care facilities, pharmacies, and independent retailers from Abbott-owned distribution centers and public warehouses

Challenge Increasing competitive pressure

Strategy Build a strong brand and expand business in the emerging market

Event 1. Sold its developed markets branded generics pharmaceuticals business to Mylan Inc. in February 2015.

2. Completed its acquisition of a controlling interest in CFR Pharmaceuticals S.A. (CFR) in September 2014.

3. Acquired control of Veropharm in December 2014.

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Abbott 2014 10-K pgs. 1-4

Company OverviewDiagnostics Segment

Product Immunoassay and clinical chemistry systems (main product)

Market Worldwide

Consumer Blood banks, hospitals, commercial laboratories, clinics, physicians' offices, government agencies, alternate-care testing sites, and plasma protein therapeutic companies

Challenge Subject to competition in technological innovation, some products in this segment can be subject to rapid product obsolescence or regulatory changes

Strategy Improve operating margin

Event 1. Completed the acquisition of Topera in December 2014.

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Abbott 2014 10-K pgs. 1-4

Company OverviewNutritionals Segment

Product Various forms of prepared infant formula and follow-on formula, adult and other pediatric nutritional products, nutritional products used in enteral feeding in health care institutions

Market Worldwide

Consumer Institutions, wholesalers, retailers, health care facilities, government agencies, and third-party distributors from Abbott-owned distribution centers or third-party distributors.

Challenge Subject to product obsolescence caused by regulatory change, new product introduction by competitors,

Strategy Take advantage of an aging population and an increasing rate of chronic disease, introduce new products and improve operating margin

Event 1. A product recall initiated in August 2013 in China and two other markets for certain pediatric nutritional products supplied to Abbott by a third-party manufacturer.

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Abbott 2014 10-K pgs. 1-4

Company OverviewVascular & Medical Device Segment

Product A broad line of coronary, endovascular, vessel closure, and structural heart devices for the treatment of vascular disease

Market Worldwide

Consumer Hospitals & public warehouses

Challenge Pricing pressures primarily related to drug-eluting stent (DES) franchise.

Strategy Improve operating margin and continue to develop its worldwide market-leading DES

Event 1. Acquired 100 percent of IDEV Technologies in August 2013.2. Acquired 100 percent of OptiMedica in August 2013.

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Investment Team

Porter’s Five Forces Analysis

Threat of New Entrants

*Low

Threat of Substitutes

*High

Supplier Bargaining

Power*Moderate

Buyer Bargaining

Power*Low

Rivalry*High

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Abbott 2014 10-K pgs. 4-7; Investment Team

SWOT Analysis

> Weakness

- No assurance of new products from R&D outcomes- High competition- Strong regulation by government

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>Threats

- Potential lawsuits and regulation costs on pollution

- Rapid product obsolescence

- Downward pressure of revenue or product pricing due to government regulation- Foreign currency exchange rate risk

- Expiration or loss of patent protection

- Competition

SWOT Analysis

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Yahoo! Finance

There was a potential sell signal around the end of September but the stock seems to be recovering

Stock Market Overview

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Abbott 2014 10-K pgs. 47-50; 2015 Q2 10-Q pgs. 3-6

Most of Abbott’s ratios have been generally improving over time with the exception of the total asset turnover ratio

Financial AnalysisRatios Analysis

9.4%

4.7%5.4%

7.2%

Return on Assets

53.3% 53.2%

54.5%

57.3%

Gross Margin

31.3%

13.1%11.3%

30.6%

Net Income Margin

0.14x

0.17x

0.22x

0.10x

Total Asset Turnover

2012

201320

14

6/30

/201

5

2012

201320

14

6/30

/201

5

2012

201320

14

6/30

/201

5

2012

201320

14

6/30

/201

5

4.25x

14.71x 17.33x

16.53x

Interest Coverage Ratio

2012

201320

14

6/30

/201

5

Current Ratio

201320

14

2.36x

2.02x

1.45x

2.30x

6/30

/201

5

2012

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Abbott 2014 10-K pgs. 47-50; 2015 Q2 10-Q pgs. 3-6

Abbott’s return on equity has been improving since its spin-off of Abbvie at the beginning of 2013

Financial AnalysisDuPont Analysis

Interest BurdenTax Burden

Asset Turnover Leverage

2012

201320

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6/30

/201

5

2012

201320

14

6/30

/201

5

2012

201320

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6/30

/201

5

2012 2013

2014

6/30

/201

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Operating Margin

2012

201320

14

6/30

/201

5

Return on Equity

2013

2014

6/30

/201

5

2012

126.2%

90.7%

187.7%

95.7%

96.9%

122.4%

7.1%

10.9%

12.8%

13.3%

29.9%

35.7%

48.1%

23.6%

2.51

1.70

1.91 1.91

23.5%

7.9%

10.3%

13.7%

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Capital IQ

These comparable companies were narrowed down by business description and industry and are competitors with Abbott

Comparable CompaniesDescriptions

Thermo Fisher Scientific, Inc.•Provides analytics instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics worldwide•Groups include Life Sciences, Analytical Instruments, and Specialty Diagnostics

Medtronic plc•Sells device based medical therapies worldwide•Groups involve Vascular, Minimal Invasive Therapy, and Restorative Therapy

St. Jude Medical Inc.•Manufactures and distributes cardiovascular medical devices for cardiac rhythm management, cardiovascular, and atrial fibrillation therapy areas worldwide•Groups include Implantable Electronic Systems and Cardiovascular and Ablation Technologies.

Stryker Corporation•Operates as a medical technology company•Groups include Orthopaedics, Medical Surgery, and Neurotechnology and Spine

Boston Scientific Corporation•Develops, manufactures, and markets medical devices for use in various interventional medical specialties worldwide•Groups include Cardiovascular, Rhythm Management, and Medical Surgery

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Capital IQ

Median multiples were chosen and were equally weighted to come a valuation of $46.20 per share

Comparable CompaniesAnalysis

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Abbott 2014 10-K pg. 68; 2015 Q2 10-Q pg. 24; Federal Reserve; Ibbotson's SBBI

The weighted average cost of capital was calculated to be 8.86% but a risk premium was added to round the WACC to 9.00%

Weighted Average Cost of Capital

Cost of Debt Cost of Equity

WACC

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Investment Team

Financial Projection

30%: On 12/12/14, ABT acquired Veropharm, a leading Russian pharm; huge growth in Russian market.

11%:Excluding foreign exchange effect, we expect the sales to growth by roughly 15% for future years; the forex impact will be -8% for 2015, but we assume ABT will hedge against it by half.

39.41%:On 9/26/14, ABT acquired CFR, more than doubles presence in Latin America; then grows steady at a lower rate than key emerging market.

Revenue Drivers and Assumptions 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Pharmaceuticals $2,769.00 $2,862.00 $3,118.00 $3,883.30 $4,283.98 $4,750.38 $5,279.61 $5,785.53

% Change total 3.36% 8.94% 24.54% 10.32% 10.89% 11.14% 9.58%

Key Emerging Market $2,281.0 $2,308.0 $3,000.4 $3,330.4 $3,730.1 $4,177.7 $4,595.5

% Change 1.18% 30.00% 11.00% 12.00% 12.00% 10.00%

Other Emerging Market $581.0 $810.0 $882.9 $953.5 $1,020.3 $1,101.9 $1,190.1

% Change 39.41% 9.00% 8.00% 7.00% 8.00% 8.00%Nutrition $6,461.00 $6,740.00 $6,953.00 $7,061.00 $7,214.11 $7,392.54 $7,572.34 $7,728.48

% Change total 4.32% 3.16% 1.01% 1.49% 1.54% 1.77% 1.70%

International Pediatric $2,075.0 $2,257.0 $2,357.0 $2,451.3 $2,537.1 $2,613.2 $2,678.5 $2,732.1

% Change 8.77% 4.43% 4.00% 3.50% 3.00% 2.50% 2.00%Diagnostics $3,279.00 $3,458.00 $3,614.00 $3,794.70 $3,984.44 $4,143.81 $4,309.56 $4,395.76

% Change 5.46% 4.51% 5.00% 5.00% 4.00% 4.00% 2.00%Vascular $2,739.00 $2,648.00 $2,570.00 $2,462.58 $2,414.79 $2,417.25 $2,433.85 $2,469.59

% Change -3.32% -2.95% -4.18% -1.94% 0.10% 0.69% 1.47%Other $3,802.00 $3,949.00 $3,992.00 $4,091.80 $4,194.10 $4,298.95 $4,406.42 $4,516.58

% Change 3.87% 1.09% 2.50% 2.50% 2.50% 2.50% 2.50%Total $19,050.00 $19,657.00 $20,247.00 $21,293.38 $22,091.41 $23,002.92 $24,001.79 $24,895.95

% Growth 3.19% 3.00% 5.17% 3.75% 4.13% 4.34% 3.73%

4%: In 2013 and 2014, there was a product recall in China; consumer confidence has been restored by the end of 2014.

We expected the long-term growth rate is 3% each year considering declining global GDP after 2019.

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Discounted Cash Flow

In 2014 and 2015, ABT aims to streamline operation and increase margin, the margin growth is forecasted to be 3% mainly driven by nutrition and diagnostic business.

In February 2015, ABT sold its developed market Established pharmaceutical business to Mylan, lowering tax rate.

DCF calculation 2015E 2016E 2017E 2018E 2019EEBIT 2736.3 3813.8 4247.2 4671.7 5094.7(-) Taxes 540.9 753.9 839.6 923.5 1007.1(+) Depreciation & Amortization 1767.4 1723.1 1794.2 1872.1 1941.9(-) Capital Expenditures 1064.7 1104.6 1150.1 1200.1 1244.8(-) Increase in NWC

Change in A/R 1946.9 207.4 236.8 259.5 232.3Change in Inventory 669.2 124.1 141.8 155.4 139.1Change in A/P 349.0 53.0 60.5 66.3 59.3

Free Cash Flow 631.0 3399.9 3733.6 4071.6 4472.5Period 0.5 1.5 2.5 3.5 4.5PV Factor 0.9578 0.8787 0.8062 0.7396 0.6785Present Value of Free Cash Flow 604.4 2987.6 3009.9 3011.4 3034.8

Sum of Present Value of Free Cash Flows 12,648.2$

Terminal ValuePerpetuity Growth rate 3.00%Terminal Value 76778.5PV Factor 0.6785Present Value of Terminal Value 52,097.9$

Value per ShareEnterprise Value 64746.1(-) Net Debt -2399Equity Value 67145.1Fully diluted shares outstanding 1512.0Price per Share 44.41$

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Investment Team

Using a 30% weight on comparable companies and a 70% weight on the DCF, our valuation came out to be $44.95

Valuation

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Final Recommendation

We recommend to hold 400 shares of ABT

Stock price is moving above the 20-day moving average

The 2015 third quarter earnings beat analysts’ expectation

We value ABT stock to be fairly priced at $44.76 (as of 10/28/15)

Current Price

# of Share

MarketValue

CostGain &%Gain

$44.76

100 Shares

$4,476 $3,155$1,321

+41.87%

200 Shares

$8,952 $4,994$3,985

+79.26%

100 Shares

$4,476 $2,538$1,938

+76.36%