AbbVie: Unique Mix of Growth, Yield and Value

05/13/2019 5:00 am EST

Focus: HEALTHCARE

Ben Reynolds

CEO, Sure Dividends

AbbVie (ABBV) — spun off from Abbott Labs (ABT) in 2013 — is a biotechnology company that is focused on the development and commercializing of treatments in immunology, virology, and oncology, notes Ben Reynolds, editor of Sure Dividend.

AbbVie generates $33 billion in annual revenue and has a $116 billion market capitalization. AbbVie reported Q1 earnings on 4/25/19 and results were better than expected. Revenue declined 1.3% year-over-year, but that slightly beat expectations.

Imbruvica continues to be a strong driver of growth for the company, grossing just over $1 billion during the quarter, a 34% increase over the prior year. Humira continues its decline as it loses patent protection, losing 5.6% in revenue year-over-year to $4.5 billion.

Humira remains the world’s highest-grossing drug despite recent declines, and AbbVie is working to replace the billions of dollars of annual revenue it will lose in the coming years as Humira’s patent protection ceases to exist. AbbVie’s earnings-per-share rose 14% year-over-year to $2.14, beating estimates.

The company’s expenses continue to be prudently managed and operating leverage remains strong. In addition, the company’s enormous buyback program saw the share count fall 7% lower year-over-year, producing roughly half of the company’s total earnings-per-share growth for Q1.

Management guided for $8.73 to $8.83 in adjusted earnings-per-share for this year, a small increase from prior guidance despite the weak revenue number for Q1. We’re now expecting AbbVie to produce $8.78 in earnings-per-share for this year, representing 11% growth from 2018.

The firm's competitive advantage is its large cash flows that allow it to spend aggressively on research and development. The company’s size advantage has allowed it to build a pharmaceutical portfolio that is robust, deep, and has potential blockbusters waiting in the wings like Imbruvica.

Its earnings-per-share compounded at 20% annually from 2013 to 2018. While Humira revenue is likely going to decline sharply in the coming years, AbbVie’s R&D is being used to create new drugs to fill the gap.

In addition, AbbVie uses some of its internally generated cash to repurchase shares and shrink the float. We expect 9.5% annual earnings-per-share growth ahead.

AbbVie trades for just 8.9 times our earnings-per-share estimate of $8.78 for this year, which compares very favorably to our estimate of fair value at 13 times earnings. AbbVie, therefore, represents a unique combination of a very high yield, strong growth prospects, and a deeply undervalued stock that offers investors 22%+ prospective total annual returns.

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