I sang love serenades for Abbott Labs’ (ABT) stock for a long time. Call me materialistic, but my love for stocks is not ‘til death do us part,’ it is conditional of fundamentals staying intact and of valuation – it has to be undervalued. Abbott Labs’ fundamentals have improved over the last couple of years – it sold its medical device unit to General Electric (GE) at a great premium and it “stole” a stent business from Guidant playing on Boston Scientific’s (BSX) urgent need to close the deal. Abbott’s management have proven the company to be a very shrewd operator. However, Abbott did what any good stock will do at some point (hopefully) – it appreciated and became fully valued. Though I still love the company, I had to say goodbye to Abbott’s stock. Hopefully, I’ll be able to buy it in the future on my terms, at a lower price.

I found a new ‘fling’ – Glaxo Smithkline (GSK) – Abbott’s worthy replacement. GSK reminds me of Abbot’s stock about two years ago: decent (very similar to ABT) growth prospects ahead (earnings growth of about 7-8% a year) further helped by a growing industry, a strong balance sheet, great return on capital of close to 40%, fat 20% plus profit margins, and a competitive moat around its business that rivals the size of Lake Michigan. All that coupled with great valuation of about 14x earnings and 3.3% dividend yield. On top of all that it comes with an added bonus, its dividend is paid in pounds and converted to dollars – if the dollar decline continues (my expectation), its earnings and dividends will rise in US dollars.

Diagnostic segment that Abbott is selling to GE for $8.5 billion generates revenues of $2.5 billion and has a 10% EBIT margin, putting a multiple of 34 times operating profits – that’s a nice fat premium – very smart on Abbott’s part.  In GE’s defense, it could probably drive some costs out of this business once it combines it with the rest of its medical business.