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How Will Baby Formula Shortage Affect Abbott?

Citing the voluntary recall of its certain infant formula products, medical devices and healthcare company, Abbott Laboratories (NYSE: ABT) lowered its full-year organic sales growth guidance during the Q1 conference call. 

For context, Abbott voluntarily recalled some of its infant formula products (including Similac, Alimentum, and EleCare) earlier this year manufactured at its facility in Sturgis, Michigan. 

The action came after the U.S. FDA (Food and Drug Administration) warned consumers not to use specific infant products from Abbott following cases of Cronobacter in four infants who consumed the products produced at the Sturgis plant. 

The product recall and shuttering of Abbott’s Sturgis facility added to the worsening of the ongoing nationwide infant formula shortage. 

To address the shortage concerns, the FDA has allowed Abbott to release supplies of certain specialty and metabolic formulas that were on hold at its Sturgis facility.

Further, Abbott unveiled the findings of the investigation at its Sturgis facility. The report stated that there was no link between infant illnesses and Abbott’s formulas. The report further highlighted that the finished product testing by Abbott and the FDA came negative for Cronobacter and/or Salmonella. 

Abbott stated that it would take six to eight weeks to bring products to the store shelves after it restarts production, which is subject to FDA approval.

BTIG analyst Marie Thibault stated, “We think it could take some time to restart production, work through quality checks, and get product back on the shelf.” She added that “despite the shortage of baby formula, we think ABT may also need to make added investments to win back brand loyalty from parents.” 

The analyst projects “a gradual recovery beginning in Q3.” 

Thibault has a Buy recommendation on ABT stock with a price target of $140.

Bottom Line

While the recall would impact Abbott’s nutrition business sales, management is upbeat about other businesses. It forecasts high-single-digit organic sales growth in the rest of its businesses, including medical devices, diagnostics, and pharmaceuticals.

Furthermore, nutrition products that are not impacted by the recall are also growing well. New product launches and expansion into high-growth areas bode well for growth. 

Wall Street analysts are bullish about ABT stock. Its Strong Buy consensus rating reflects seven Buy and one Hold recommendations. Further, ABT’s average price target of $142.63 indicates 34.8% upside potential to current levels.

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