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Buy The Best In Class Pharmaceutical Company

|Includes: AbbVie Inc. (ABBV)


Strong cash flows.

Deep product pipeline.

Attractive options pricing.

Price target 80 - 45% upside.

AbbVie Inc. (NYSE:ABBV) is a large cap pharmaceutical company that was spun off from Abbott. It outperforms its peers in many key financial metrics. The company has strong growth. For example, quarter over quarter growth as reported on Friday the 29th was 18.4% for revenue and 27% for quarter over quarter earnings per share. The market was underwhelmed by this astounding performance and shares sold off 1.7%. The company is a real bargain at this price with a price to free cash flow ratio under 18.1 after backing out the over nine billion in cash on the balance sheet.

In many of its segments, AbbVie sells the leading drug, including Synthroid, a synthetic thyroid substitute, and Lupron for prostate cancer. Another well-known AbbVie drug is Humira, an antibody for autoimmune diseases. Other important products include Imbruveca, Viekira, Creon, Synagis, Kaletra, AndroGel, Sevoflurane, and Duadopa. And according to the most recent 10-K filing, "AbbVie's pipeline includes more than 40 compounds or indications in clinical development individually or under collaboration or license agreements. Of these programs, approximately 13 are in Phase 3 development or in registration. R&D is focused on therapeutic areas that include immunology, virology/liver disease, oncology, renal disease, neurological diseases, and women's health, among others."

Operating margins are strong and it is evident from the fact earnings are growing faster than revenue that the company is built to scale well. Competitors Pfizer and Merck have operating margins of 30 and 21 percent respectively. ABBV trounces them both with an operating margin of 36 percent. Where the company really shines is in its PEG ratio, this is a true 'growth at a reasonable price' pick. Yahoo! Finance is currently reporting a five year PEG for Pfizer and Merck of 3.23 and 3.67, respectively. The five year PEG for AbbVie is a very low 0.56 per the same source.

This is also a company that rewards shareholders. Since inception in 2013, the company has raised its distribution four times. Overall, the dividend has grown from forty cents a share per quarter to fifty seven cents a share per quarter. That is 42.5 percent growth in three and a quarter years. The company has also bought back almost six and half billion dollars of its own stock over the trailing twelve months. The current yield is 4.08% and is unlikely to stay so high once the market warms to this incredible growth story.

I have a price target of 80 dollars on AbbVie, indicating 63.9% upside versus Friday's closing price. Investors can buy now or earn about 24 percent annualized by selling the March 4, 2016 expiry 54.50 put for 2.25 a contract. If assigned, such a trade would result in a 4.8 percent discount below Friday's closing price of 54.90.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABBV over 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.