Despite A 65% Rally AbbVie Stock Looks Like It Can Gain More

ABBV: AbbVie logo
ABBV
AbbVie

AbbVie stock (NYSE: ABBV) is up 18% since the start of the year and it has gained around 62% from its March lows. Despite the recent rally, AbbVie could offer an upside in the near term, as the company’s revenues in the last three quarters have grown by 30%, primarily aided by the Allergan acquisition. AbbVie is also seeing market share gains for some of its new drugs, such as Venclexta and Skyrizi. This is likely to bolster the earnings growth rate of the company in the near term – leading to stock price growth.

ABBV stock has rallied from $67 to $105 off the recent bottom compared to the S&P which moved 61% over the same time period. Better than estimated earnings in Q2 and Q3 has helped ABBV stock rally over the recent months. Moreover, the stock is up 13% from levels seen in early 2018, over two years ago. ABBV stock has fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the 62% rise since the March 23 lows, we feel that the company’s stock still has potential as it has benefited from the recent acquisition and its valuation implies it has further to go. Our dashboard ‘Buy Or Sell AbbVie Stock provides the key numbers behind our thinking, and we explain more below.

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Some of the stock price rise over the last 2 years is justified by the roughly 1.6% growth seen in AbbVie’s revenues from $32.8 billion in 2018 to $33.3 billion in 2019, and the figure is $40.6 billion for the last 4 quarters. This clubbed with Net Margin expansion of 36.5% from 17.4% to 23.7% meant that earnings grew 39%. On a per share basis, earnings were up 44% from $3.67 to $5.30, led by a 4% decline in total shares outstanding due to share repurchases. The strong margin expansion can primarily be attributed to a 38% decline in R&D expenses, due to impairment charges related to the 2016 Stemcentrx acquisition. R&D expense has further declined 4% y-o-y for the nine months period ending Sep 2020.

Finally, AbbVie’s P/E ratio contracted despite revenue and earnings moving higher. It declined from 25x in 2018 to 17x in 2019. While the company’s P/E has now increased to 20x trailing earnings, it could see further expansion given the benefit to its business from the Allergan acquisition as we discuss below, and higher revenues and earnings growth in 2020 and beyond.

How Is Coronavirus Impacting ABBV Stock?

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 sales for pharmaceutical companies, such as AbbVie. However, AbbVie in particular has benefited from the Allergan acquisition it completed in May 2020.

Allergan has expanded AbbVie’s portfolio with its existing blockbuster treatments, including Botox, Restasis, and Juvederm, which combined garnered $2.3 billion in sales thus far in 2020, accounting for over 7% of the company’s total sales, which is highly dependent on a single drug – Humira. With the Allergan acquisition, Humira will now account for less than 40% of the company’s total sales (compared to 60% earlier), 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 (with the U.S. FDA approving its biosimilars), 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.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 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, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of $105, ABBV stock is trading at just 9x its 2021 estimated adjusted earnings of $12.19, compared to levels of 12x seen in 2018 and 10x seen as recently as late 2019, implying the stock still has some room for growth.

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