AbbVie (ABBV) is a biopharmaceutical company focused on key therapeutic areas like immunology, oncology, neuroscience, eye care, virology, women’s health, and gastroenterology. The company was founded on October 19, 2011, and is headquartered in North Chicago, IL.
Shares of AbbVie have gains of 25.9% in 2021 and have underperformed the S&P 500, although the underperformance is marginal. I am bearish on ABBV stock. High levels of debt and declining profitability margins are among the risk factors.
AbbVie Business News
Allergan Aesthetics, an AbbVie company, announced on December 16 that it had completed the acquisition of Soliton. The company believes that Solition’s technology complements Allergan Aesthetics’ portfolio of non-invasive body contouring treatments.
The company also announced that the U.S. Food and Drug Administration (FDA) has approved RINVOQ® for the treatment of adults with active psoriatic arthritis. In addition, VUITY™ (pilocarpine HCl ophthalmic solution) 1.25%, the first and only eye drop approved by the U.S. Food and Drug Administration (FDA) to treat presbyopia, is now available by prescription in pharmacies nationwide.
Q3 Earnings
ABBV stock has rallied over 24% in the past three-month period, partly attributed to strong Q3 2021 financial results. Third-quarter diluted EPS of $1.78 on a GAAP basis showed an increase of 38.0% compared to EPS of $1.29 in Q3 2020. Net revenue of $14.3 billion was up 11.2% on a GAAP basis, and the firm raised its 2021 GAAP diluted EPS guidance range from $6.04 to $6.14 to $6.29 to $6.33.
Additional positive news includes announcing an 8.5% dividend increase in 2022, beginning with a dividend payable in February. The quarterly cash dividend increased from $1.30 per share to $1.41 per share. AbbVie’s dividend has been raised significantly over the past years.
Fundamental Risks
AbbVie’s guidance increase and better than expected third-quarter earnings currently support the stock.
There are, however, several key risk factors to consider now. Gross margin, operating margins, and net margins have declined over the past five years. The TTM gross margin of 70.2% is very high, but it was even higher in 2019, at 77.6%.
The net margin of 9.9% in 2020 has declined significantly compared to 23.6% in 2019. The overall financial strength of AbbVie is not great due to a large debt level. In the last quarter, its D/E ratio was 5.96.
AbbVie has increased its dividend, but the dividend payout ratio is now considered too high. The current dividend payout ratio of AbbVie Inc is 120%, which does not seem sustainable. There is also a tradeoff between growth and expanding operations.
Very high dividend payout ratios come to at the expense of future growth opportunities and may lead to a dangerous decline in the firm’s cash reserves. A stable payout ratio over many years is safer than a volatile trend.
On the positive side, AbbVie has a solid and positive free cash flow trend and, except for 2019, strong revenue growth. The revenue growth in the first nine months of 2021 has lost its momentum, especially for Q1, during which AbbVie reported a quarter-over-quarter decline of 6.12% compared to Q4 2020.
Valuation: Trading at a Premium
ABBV stock is relatively overvalued compared to its industry. Its P/E and P/B ratios are 31.5x and 17.4x, respectively. This compares to the industry averages of 26.1x and 2.7x, respectively.
Wall Street’s Take
Turning to Wall Street, AbbVie has a Strong Buy consensus rating, based on 11 Buys and three Holds assigned in the past three months. The average AbbVie price target of $133.00 implies -0.7% downside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates Read full disclaimer >
