AbbVie Stock Has More Upside?

Despite over a 55% rise since the March 23 lows of this year, at the current price of around $100 per share we believe AbbVie stock (NASDAQ:ABBV) has more room for growth. AbbVie’s stock has rallied from $65 to $100 off the recent bottom compared to the S&P which moved 44%, with the resumption of economic activities as lockdowns are gradually lifted. AbbVie stock is also up 18% from levels seen in early 2018.

AbbVie stock has fully reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential, because of its current valuation, and the recent Allergan acquisition, which has expanded its drugs portfolio.

Some of this rise of the last 2 years is justified by the roughly 18% growth seen in AbbVie’s revenues from 2017 to 2019, which clubbed with margin expansion from 19% to 24%, and a 7% dip in total shares outstanding, translated into a strong 60% EPS growth.

While the company has seen steady revenue and earnings growth over recent years, its P/E multiple has contracted. We believe the stock is likely to see significant upside despite the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 18% Change in AbbVie Stock between 2017 and now?‘, has the underlying numbers.

AbbVie’s P/E multiple decreased from 26x in 2017 to 16x in 2019. While the company’s P/E is now 19x there is an upside when the current P/E is compared to levels seen in the past years, P/E of 26x at the end of 2017 and 23x as recent as late 2018.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower prescriptions being issued. Though the impact of the current pandemic was minimal on AbbVie in Q1, with its sales growing 10% due to inventory stocking benefit in the wake of Covid-19, we believe the company’s Q2 results on July 31 will confirm the hit to its revenue.

One of the reasons for the decline in P/E multiple for AbbVie despite strong earnings growth over the recent years was its reliance on one particular drug – Humira – which accounts for 60% of its total sales, and its period of market exclusivity will end in 2023, exposing the blockbuster drug (annual sales of over $19 billion) to biosimilar competition. However, AbbVie in May 2020 completed the acquisition of Allergan, which has expanded AbbVie’s portfolio with Allergan’s existing blockbuster treatments, including Botox, Restasis, and Juvederm. With the Allergan acquisition, Humira will now account for less than 40% of the company’s total sales, and the figure will be even lower over the coming years, as sales from its relatively new drugs, Venclexta, Skyrizi, Rinvoq, and Orilissa among others, gain market share. Another important drug for AbbVie is Imbruvica, which garnered $4.7 billion in sales in 2019, and its peak is estimated to be north of $7 billion. While Humira sales are expected to decline over the coming years, we believe AbbVie’s current portfolio as well as its robust pipeline will likely be able to more than offset it and bolster the company’s overall earnings growth.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on 2021 results and beyond. Given AbbVie is trading at an attractive valuation, when compared to the historical P/E multiple for the company, the stock will likely see more upside in the near term. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

While AbbVie stock looks like it can gain more, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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