Attendees walk past the Abbott booth during CES 2024 at the Las Vegas Convention Center on January 10, 2024 in Las Vegas, Nevada.
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Shortly after the market opens, we will buy 140 shares of Abbott Laboratories stock at about $112. Upon completion of the transaction, Jim Cramer’s Charitable Trust will hold 700 shares of ABT stock, increasing our weight in the portfolio from 1.95% to 2.42%.
We are buying more Abbott Laboratories Recent weakness comes as we continue to believe the market has overestimated the risk of infant formula litigation.
Abbott stock fell Friday after jury order Reckitt Benckiser $60 million to a plaintiff whose premature infant died of necrotizing enterocolitis, also known as NEC, after being fed Reckitt Benckiser’s Enfamil formula. Abbott is not involved in the case.
Whenever headlines like this come out, the market tends to shoot first and ask questions later. In this example, Markets looked at the roughly 1,000 pending lawsuits against Abbott Laboratories, multiplied that by the $60 million paid to one plaintiff (the plaintiffs were seeking a smaller amount, $25 million), and calculated that Abbott Laboratories In the worst-case scenario the exposure could be as high as $60 billion.
Here is Abbott’s official statement: “Abbott has spent decades researching, developing, testing and producing preterm formulas and fortifiers, and countless babies have benefited greatly from these products. These accusations are baseless and are simply made. A theory advanced by plaintiffs’ attorneys, not a theory advanced by plaintiffs.” The medical community considers these products part of the standard of care for premature infants. “
We can learn a few key things from this statement. First, there is no scientific data showing that Abbott formula causes NEC, despite pending litigation claiming that these premature infants developed NEC from the infant formula. Second, there aren’t many nutritional feeding options for premature babies other than products from Abbott and Reckitt Benckiser. This is the standard of care because of the lack of alternatives.This is a completely different situation Johnson & Johnsonof talcum powder litigation.
Since the news broke, Abbott’s shares have fallen about 6%, while the S&P 500 has risen 1.4%, wiping out about $14 billion in market value. We’re not lawyers, but based on the facts of the situation, this drop seems excessive.
Abbott Laboratories stock performance over the past month.
If Abbott attempts to settle all pending litigation, the final number could be far less than the market cap the company has lost, making the recent pullback a buying opportunity. We also bought some Abbott stock on Friday.
Wall Street analysts weighed in on the matter.
JPMorgan said last week that they believe “the final number is likely to be significantly lower than the $60 billion suggested… We believe that number will be a fraction of that, at best, many years from now.”
In Evercore ISI’s historical scenario analysis, analysts believe the settlement amount could be well below $250 million based on currently pending cases. Wells Fargo is in a similar position. The company estimates the potential settlement amount to be approximately $280 million, based on assumptions about recent litigation settlement efforts.
Meanwhile, analysts at Jefferies wrote that “the final outcome is difficult to determine, but is likely to result in a manageable fine for ABT.”
We don’t want to trivialize the situation because NEC sucks. We can’t ignore the suspense this news creates for Abbott Labs. Abbott is a high-quality healthcare company that has many other businesses besides infant formula. It may last for a while. However, when we compare the billions of dollars in market capitalization losses over the past week to a possible settlement, we conclude that the sell-off was overdone.
(Jim Cramer’s charitable trust has long held ABT. See here View the full list of stocks. )
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