AbbVie: Any Upside Left At $115?

Summary

• 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.

Source: Sentimentrader.com

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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[somedata1]

ABBV/ABT is the no. 2 greatest stock of all time. Philip Morris/Altria Group is no. 1. I'm long No. 1 and No. 2 am regretting that I don't have more shares of them.

[User 376184]

Does or will ABBV have some involvement in the cannibus industry?

[AlieGee]

See this on SA

AbbVie: Poised For Continued Growth In 2018 by Stefano Sengos.

Different view for continued growth.

[Dman101]

Valuation of current assets and cash is much much higher
Buy this undervalued and get in before new pipeline approved

[Jimghad]

I totally see the world your way.
Your statement:
"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." is very accurate.
Humira generic will hit Europe this fall (2018 ) . This represents $6.0 Billion. of Humira in ROW.This will impact growth in 2019.
The 2 new product down the road : Upadacitinib and Risankizumab are in a highly competitive field.
The day SA reports a patent challenge..everyone will rush to the exit.

[curiousone2004]

Not impressed by an article from someone who never saw fit to put money in ABBV all along the way.

[TaiPan]

idahoradm:

Would you buy a stock for which EPS and FCF was flat but also quite high?

Yes, it's wise to buy a stock that is increasing FCF and EPS by (e.g.) 10% a year, even if they are currently quite low, but is it not also a good idea to buy a stock where EPS and FCF are already high, though not likely to rise much further?

[idahoradm]

Likely not unless it's cheap but often the cheap get cheaper until there's a growth catalyst.

[tikigod18]

IF you are a dividend growth investor, what better dividend growth can you find? COR raised 50% last Dec., and more this year, but those are few and far between.

[idahoradm]

Exactly.
The whole point of dividend Growth is to eventually own something that's yielding to yourself much more than it was on your initial investment. The goal for me is to eventually multiply yield over time.
If the dividend and/or yield on cost doubles in 5 or 6 years, then likely you'll also be gaining capital appreciation as well. The company needs strong earnings and cash flow growth to achieve that.
This is also why I don't own stocks with stagnant earnings, sales, and cash flow growth.

[tikigod18]

with a 35% dividend raise within the last month, and a $10B buyback announced, I am sticking with a stock which has given me a 500% increase since the spin off. Most others I sold 1/2. Investors need to watch the $123 area which could have a number of sellers, since it ran up there on 2 different short squeezes recently. Those buyers may become sellers, making that a strong resistance, but selling? Replace with what IS THE QUESTION? So easy to say sell. Why not just sit on gains, reinvest dividends, and let it grow to it's valuation.

And no, no inside info on short squeeze. It may have just been overly hyped investors; halting the stock for a dividend increase seems to have been designed for the bump. I have not seen excessive inside selling though.

Just my .02

[kevn1111]

If I were to replace it would be in Tech - semi and equipment manuf.

MU
LRCX
AMAT

These are performing exceptionally well and I see them still moving higher. With that said, I view ABBV as a longer term investment and am holding my position as noted above.

I did sell my LMT...just didn't like the action on it, but who knows maybe it will make another leg up.

[mikefconnell]

I'm selling a little ABBV. Better buy is INTC. Finally closed above 50.

[tom168ko]

Just need to wait til next er.

[Buyandhold 2012]

AbbVie? Any upside left at 115?

I sure hope so. Because I am never selling it.

[ktonn14]

"any upside left?" depends on whether you're looking at the next 6 months or the next 10 years. Always, always, ALWAYS need to consider one's time horizon.

For me, long ABBV. Wouldn't mind a split, though.

[tom168ko]

wait til the buy back in play.

[idahoradm]

This article is the same type of fear and doubt there was before the run-up last summer. Yes Yahoo finance shows 35 trailing PE, but the forward PE is 13 after some earnings estimate increases which is pretty cheap. I bought more after the dividend raise.

[btw3006]

Exactly. I agree with everything you said. It's as if people don't learn anything from past mistakes. When I make decisions on stocks to buy shares or call options in, I look at the NUMBERS. Numbers tell me that this stock is pretty cheap, like you said.

I own 3 Jan 2019 $95 strike calls that are up 400% since I bought them on 9/18/2017. Still a lot more upside. Looking to either buy shares or those Jan 2019 or Jan 2020 $120 or $125 strike calls.

[Amesbury Investments]

I was lucky enough to get in before the run up started based on reading multiple articles and looking into how undervalued it was. I still added more in the 115s because I agree, based on future earnings and the performance of the company, the stock is still undervalued in my opinion. The dividend and growth is great.

[idahoradm]

One more thing to point out is that the dividend payout ratio is 76% compared to trailing earnings which is getting a little high. BUT, based on forward earnings, the payout ratio is less than 40% which is a fairly comfortable ratio. I think $ABBV will be over $140 at least by the end of 2018. 21% + >3% yield. Not that I'm writing this down, it's making me consider if I should buy even more! Long $ABBV.

[VanWelij]

You make some good arguments. I would not add more at this point, but would definitely hold. The dividend increase was just icing on the cake.

You may want to check your article for errors, spelling, and missing commas. Certain parts, in my opinion, were quite difficult to read.

[TaiPan]

To your grammar comments, VanWelij, I would add that "eluded" does not exist; the word is "alluded". But as the old Winston ad said, "what do you want; good grammar or good taste?". The author may be forgiven some English errors if his thesis is a good one.

[VanWelij]

I don’t necessarily mind English errors at all; Lord knows I make them all the time. It’s the sentence structure and missing commas that don’t make it a smooth read.

It is because the thesis is interesting that poor flow becomes even more disruptive. If the thesis was silly then it wouldn’t have stood out at all.

[Herbert Gamache]

I've owned ABBV for about 20 years (most of the time when it was part of ABT).. It has always been a good investment whose upward movement has accelerated since my last increased investment about one year ago. I think ABBV's positive performance will continue (but probably at a slower pace) in the future. Thank you for this nice posting.

[btw3006]

I respectfully disagree. Based on the earnings estimate of $7.38, this stock is actually UNDERVALUED. This stock should be around $140-$150 at some point this year. While I'm not a "journalist" or an "analyst", I think people really underestimate AbbVie's future growth.

[kevn1111]

The market looks forward and yes the expected earnings are 7.38-7.48. so pe is 23 ish. Last year was a great growth year. 2018 will be better partly due to tax. Take that away and still good and pays over a 3% dividend. I think it is within the range it needs to be with upside as they announce next qtr. Holding my 800 shares. Need to do more research on how much of the 2018 lift is tax vs actual growth. The pipeline does provide for upside.