- Growth was solid in 2017, and more looks to be in the cards in 2018.
- However, we don't like the debt pile and lack of equity on the balance sheet, despite the whopping dividend raise.
- The stock also seems to be ignoring sentiment numbers.
- We will remain on the sidelines.
The market craves growth and that is exactly what AbbVie (NYSE:NYSE:ABBV) is doing at present. Now that we have 2017 numbers, we can see that top line sales grew by more than 10% to reach $28.2 billion which outpaced analysts expectations by about $200 million. Furthermore management of AbbVie guided a significant increase in their profits for fiscal 2018. In fact, fresh earnings per share guidance is now coming in at around $7.38 (midpoint) whereas analysts are guiding $0.10 per share more for the fiscal year.
In fact analysts have increased their earnings projections for 2018 by almost $1 per share over the past 60 days and they obviously didn't foresee the strong organic growth and tax cut to single digits AbbVie now has in front of it. The elevated growth profile of AbbVie has spiked the shares by almost 20% already this year. The share buyback program a long with the huge increase in the dividend has also added fuel to the fire. AbbVie is now trading with an earnings multiple of almost 35 and a sales multiple of 6.5. These valuation numbers are well above average so I would be recommending traders adopt a level of caution here. Here are some reasons I would not be chasing this move whether from a capital gains standpoint or a dividend perspective.
Firstly although Humira hit it out of the park again in 2018, an increasing number of viable competitors are coming on line. Humira which makes up over 50% of top line sale and 70% of profits grew its top line by 14% in 2017 to reach almost $4.9 billion where the US market grew by 15% making up 67% of the Humira take. Similar growth in the US has been penciled in for 2018 which may indeed materialize. However I feel that long term investors may be be getting a tad distracted by near term growth projections and not looking what in coming down the track in terms of competition.
For example the JAK inhibitors (IL-23 & IL-17) have received plenty of plaudits and look like that they will take market share off Humira in the respective segments they operate in. Bulls will argue that AbbVie's potentially strong cancer pipeline will be able to offset the probable Humira sales losses but again this is subjective. Imbruvica looks like it will gain traction so management with aim to leverage its success as much as possible with its cancer research & pipeline. As we have seen though from other biotech players, strong pipelines "seem" to be a dime a dozen and is no guarantee of future success especially considering present heightened competition.
As eluded to earlier, if a company demonstrated strong growth, the market will reward the shares handsomely. However there is very little equity on the balance sheet ($5.1 billion) due to the $37.37 billion of total debt which remains outstanding. Now as long as growth continues, the market is not that worried about the balance sheet.
The interest coverage ratio comes in a 7.72 means EBID which is the company's pre-tax profits are almost eight times the interest payments which is due on the debt number above. Therefore the dividend also looks rock solid. However debt loads and specifically a lack of equity on the balance sheet can hit hard if a downswing were to ensue. Protecting the downside is key in how we trade. The risk/reward just doesn't seem to be there at present considering the company's valuation.
This stock came across my desk as a result of its sentiment being on the pessimistic side - short term. However what long term investors need to consider here is that many of the ultra optimistic sentiment readings given over he past 9 months or so have been false dawns due to the changed steeper upward trend of AbbVie's shares.
We usually to buy on pessimistic extremes and sell on optimistic ones but AbbVie's shares have rallied relentlessly since the middle of last year. What's the takeaway ? It's that the opposite can also happen. When a stock is not doing what it should be doing from a sentiment standpoint ( which is one of our key trading tools), it's hard to gain an edge. We prefer visible two sided markets where we are confident in buying sell-off and selling rallies. We just do not have that at present with AbbVie.
Therefore we will stand pat with this trade for the time being. When the risk/reward profile turns in our direction once, we may take another look.
This article was written by
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