Trading On margin

This action is likely to outperform Abbott Laboratories


We believe Dexcom (NASDAQ: DXCM) stock is currently a better choice over Abbott stock, although Dexcom is more expensive of the two. Dexcom is trading at around 25 times trailing revenue, compared to just 5 times for Abbott. While both companies have benefited from increased demand for portable continuous glucose monitoring devices that do not require fingerprints, Dexcom’s financial performance has been better in recent years as Abbott is more diversified. and some of its activities, including medical devices, were injured during the pandemic. However, there is more to the comparison. Let’s go back to take a closer look at the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Abbott vs. Dexcom: industry peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.

1. Dexcom’s revenue growth has been stronger

Now, although Abbott’s revenue growth over the past twelve months has been slightly higher than that of Dexcom (28% vs. 26%), given a strong rebound in demand for medical devices, with the increase in the volume of elective surgeries, things are very different if it was to look at the average revenue growth over three years. Dexcom’s 39% CAGR over the last three years is nearly 5 times that of Abbott’s 8% CAGR. Note that Abbott’s revenue base is much larger with $ 40 billion in sales over the past twelve months, compared to just $ 2 billion for Dexcom.

Going forward, Dexcom is expected to experience strong revenue growth with continued demand for its CGM devices and the launch of the new G7 device which is 60% smaller than the current G6, making it the smallest CGM device available. on the market. Abbott has a similar device – Freestyle Libre – and its sales will also see strong growth, given the limited competition for these two companies. That said, Abbott generates most of its revenue from other segments, which are not expected to experience strong long-term growth. With economies opening up, demand for medical devices is expected to remain high in the near term, but will normalize once the Covid-19 crisis is over. Our Abbott Revenue dashboard provides more information on the company’s revenue.

2. Both companies experienced similar margin growth

Similar to the pattern seen in revenue growth, Abbott’s 18% operating margin growth over the past twelve months is slightly better than Dexcom’s 16%. However, if we looked at the change in operating margin over the past three years, Dexcom’s 26% figure exceeds Abbott’s 4% change. Dexcom’s operating margin of 15.9% over the past twelve months compares to 9.4% in 2019, before the pandemic. The current operating margin of 18.5% for Abbott is higher than that of Dexcom, and it compares to the 14% figure in 2019. Overall, for both companies, margins are up, but the pace is better for Dexcom. We expect the margins of both companies to improve in the future. While Abbott is expected to benefit in the short term from continued demand for its Covid-19 tests, followed by increased demand for medical devices with an increase in the volume of procedures, Dexcom’s margins could also increase with the launch of G7 and continued market share for CGM devices. wins.

The net of everything

Now that more than half of the U.S. population is fully vaccinated against Covid-19, with a pickup in global economic activity, demand for medical devices is expected to increase in the future, which bodes well for Abbott. For Dexcom, not much has changed during the pandemic. It continued to gain market share for its CGM devices. As the Covid-19 crisis draws to a close, demand for Covid-19 testing is likely to decline significantly, and sales of medical devices will also normalize once the backlog of procedures is cleared. Abbott’s Freestyle Libre, however, will likely continue to experience strong growth. However, for Dexcom, its growth prospects depend on market share gains for its CGM devices and is expected to remain high over the next few years, given limited competition, significant benefits (such as no finger prick ) and a large diabetic patient base (over 34 million in the United States alone).

Covid-19 proves more difficult to contain than initially thought, due to the spread of more contagious viral variants and infections in the United States are higher than they were a few months ago . That said, both companies have seen their margins increase since the pandemic. While Abbott’s current valuation is surely more attractive than Dexcom’s, with ABT shares trading at around 5.4x trailing earnings, compared to Dexcom’s 24.9x, the latter has demonstrated better revenue growth and an expansion of margins in recent years. Not only that, even if we looked at financial risk, Dexcom’s 3.2% debt as a percentage of equity is well below 8.6% for Abbott, and Dexcom’s 19% cash as a percentage of assets. is also better than the figure of 12%. for Abbott. Overall, Dexcom trumps Abbott in most measures important to investors and we believe this valuation gap between Abbott and Dexcom is broadly justified. In fact, going forward, it is likely that the valuation spread of these two companies will persist for the foreseeable future and Dexcom could continue to outperform with its better growth prospects and lower risk.

While DXCM stock may experience higher levels, 2020 has created many price discontinuities which may provide some interesting trading opportunities. For example, you’ll be surprised at how counterintuitive stock valuation is to Abbott vs. Corcept.

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