Attendees walk by the Abbott booth during CES 2024 on the Las Vegas Convention Center on January 10, 2024 in Las Vegas, Nevada.
Ethan Miller | Getty Images
Shortly after the opening bell, we can be buying 140 shares of Abbott Laboratories at roughly $112. Following the trade, Jim Cramer’s Charitable Trust will own 700 shares of ABT, increasing our weighting within the portfolio to 2.42% from 1.95%.
We’re buying more Abbott Laboratories into its recent weakness as we proceed to consider the market is overestimating the chance of infant formula litigation.
Abbott shares began its slide Friday after a jury ordered Reckitt Benckiser to pay $60 million to a plaintiff whose premature baby died of necrotizing enterocolitis, also referred to as NEC, after being fed Reckitt’s Enfamil formula. Abbott was not involved in this case.
At any time when headlines like this break, the market tends to shoot first and ask questions later. In this example, the market checked out Abbott’s roughly 1,000 pending lawsuits and multiplied it by the $60 million payout to at least one plaintiff — who was looking for a smaller figure of $25 million — and calculated that Abbott’s worst-case scenario exposure may very well be as much as $60 billion.
Here is Abbott’s official statement: “Abbott has spent a long time researching, developing, testing and producing formulas and fortifiers for premature infants, and countless infants have benefitted tremendously from these products. These allegations are without merit, advancing a theory promoted by plaintiffs lawyers quite than the medical community, which considers these products part of the usual of look after premature infants.”
There are a number of key things to know from this statement. First, there isn’t any scientific data that shows Abbott’s formula causes NEC despite the fact that the pending lawsuits allege these premature infants developed NEC consequently of the child formula. Second, premature infants haven’t got many feeding options for nutrition beyond Abbott’s and Reckitt’s products. It’s the usual of care because there may be a scarcity of alternatives. This can be a completely different situation from Johnson & Johnson‘s talc litigation.
Because the news broke, Abbott’s stock price has fallen roughly 6%, compared with 1.4% gain within the S&P 500, and has lost about $14 billion of market cap. We aren’t lawyers, but this decline looks way too excessive based on the facts across the situation.
Abbott Labs’ stock performance over the past month.
Within the event Abbott tries to settle all of the outstanding lawsuits, the ultimate number would likely be far below the market cap 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 they think “the final word number would likely be substantially lower than the $60 billion implied…we might put the number at a small fraction at best in a few years from now.”
In Evercore ISI’s scenario evaluation based on historical context, analysts think a settlement may very well be well under $250 million based on current cases outstanding. Wells Fargo is in similar territory. The firm estimated a possible settlement of roughly $280 million based on their assumptions of recent litigation settlement efforts.
Meanwhile, Jefferies analysts wrote, “the final word final result is difficult to find out, but would most certainly lead to a manageable high-quality for ABT.”
We do not intend to make light of the situation because NEC is terrible. And we won’t ignore the overhang this news has created around Abbott Labs, a high-quality health-care company that has loads more going for it beyond baby formula. It could linger for a while. Nonetheless, after we compare the billions of lost market capitalization over the past week to what a settlement could potentially seem like, our conclusion is that this sell-off is overdone.
(Jim Cramer’s Charitable Trust is long ABT. See here for a full list of the stocks.)
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