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AbbVie (NYSE:ABBV) is a relatively young company in the sense that it has not been a stand-alone publicly traded company for very long. Intelligent Investors must be extremely cautious when evaluating such companies, because the financial information available may not be reliable enough to come to conclusions about the company. Spin-offs in particular present difficult valuation situations because the earnings data inherently presents the possibility of speculating (i.e. would the company have achieved these reported results if it had been a stand-alone company at the time?). As a result, Intelligent Investors must base the analysis completely on the fundamentals, and those looking to avoid as much risk as possible may wish to avoid the company altogether. The ModernGraham analysis is intended to compile information in order to compare an investment opportunity against another, and what follows is a specific look at how AbbVie fares in the ModernGraham valuation model.

Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS

  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS

  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL

  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL

  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL

  6. Moderate PEmg ratio - PEmg is less than 20 - PASS

  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS

  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL

  3. Earnings Stability - positive earnings per share for at least 5 years - FAIL *due to short history as stand-alone company

  4. Dividend Record - currently pays a dividend - PASS

  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Value Based on 3% Growth

$40.15

Value Based on 0% Growth

$23.53

Market Implied Growth Rate

4.35%

Net Current Asset Value (NCAV)

-$5.12

PEmg

17.20

Current Ratio

2.41

PB Ratio

21.13

Balance Sheet - 9/30/2013

Current Assets

$16,543,000,000

Current Liabilities

$6,875,000,000

Total Debt

$14,375,000,000

Total Assets

$28,252,000,000

Intangible Assets

$8,192,000,000

Total Liabilities

$24,675,000,000

Outstanding Shares

1,587,760,000

Earnings Per Share

2013 (estimate)

$2.67

2012 *subsidiary of Abbott Labs

$3.35

2011 *subsidiary of Abbott Labs

$2.18

2010 *subsidiary of Abbott Labs

$2.65

2009 *subsidiary of Abbott Labs

$2.94

2008 *subsidiary of Abbott Labs

$2.57

Earnings Per Share - ModernGraham

2013 (estimate)

$2.77

2012

$2.79

2011

$2.36

2010

$2.18

2009

$1.67

2008

$0.86

Conclusion:

AbbVie appears to be a company with prospects for becoming suitable for the Enterprising Investor in a few more years; however, at this time it is not suitable for either the Defensive Investor or the Enterprising Investor. Intelligent Investors following the ModernGraham approach based on Benjamin Graham's methods are very cautious investors, and choose to rely only on the most accurate data possible. In this case, the majority of the earnings data invites the possibility of speculation because no one can determine exactly how AbbVie would have performed as a stand-alone company during the years it was actually a part of Abbott Labs (NYSE:ABT). As a result, the company fails the requirements for the Defensive Investor, who requires a ten-year operating history, and the Enterprising Investor, who normally requires a five-year operating history. Therefore, Intelligent Investors should research other companies, such as those that pass the ModernGraham requirements. From a valuation standpoint, it is impossible for the ModernGraham valuation model to present an accurate calculation of intrinsic value without having a longer history to determine the company's demonstrated level of earnings growth; however, it should be noted that the market is implying a growth rate in earnings of 4.35%. Individuals choosing to speculate on the company's value can make estimations on their own about whether that growth rate is high or low.

Disclaimer: The author did not hold a position in AbbVie or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of AbbVie