Pharmaceuticals Stocks

Abbvie Inc. Quarterly Valuation – February 2015 $ABBV

logo_abbvieBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – January 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Abbvie Inc. (ABBV) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): AbbVie Inc. (AbbVie) is a global research-based pharmaceuticals company. The Company’s products are used to treat chronic autoimmune diseases, including rheumatoid arthritis, psoriasis, and Crohn’s disease; human immunodeficiency virus (HIV); endometriosis; thyroid disease; Parkinson’s disease, and complications associated with chronic kidney disease and cystic fibrosis, among other health conditions, such as low testosterone. AbbVie’s portfolio of products includes HUMIRA, Synthroid, AndroGel, Creon, Kaletra, Norvir, Lupron, Niaspan, TriCor, TRILIPIX, Synagis, Duodopa, Duopa, Zemplar and Sevoflurane AbbVie also has a pipeline of new medicines, including more than 20 compounds or indications in Phase II or Phase III development across medical specialties as immunology, virology/liver disease, oncology, renal disease, neurological diseases and women’s health. It markets medicines in approximately 170 countries.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $56.90
MG Value $18.75
MG Opinion Overvalued
Value Based on 3% Growth $31.71
Value Based on 0% Growth $18.59
Market Implied Growth Rate 8.76%
Net Current Asset Value (NCAV) -$3.88
PEmg 26.02
Current Ratio 2.65
PB Ratio 19.72

Balance Sheet – September 2014

Current Assets $17,555,000,000
Current Liabilities $6,635,000,000
Total Debt $14,469,000,000
Total Assets $28,454,000,000
Intangible Assets $7,542,000,000
Total Liabilities $23,809,000,000
Outstanding Shares 1,610,000,000

Earnings Per Share

2014 $1.10
2013 $2.56
2012 $3.35
2011 $2.18
2010 $2.65
2009 $2.94
2008 $2.57

Earnings Per Share – ModernGraham

2014 $2.19
2013 $2.73
2012 $2.79
2011 $2.36
2010 $2.18
2009 $1.67

Dividend History

Conclusion:

Abbvie Inc. is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability over the last ten years, short operating and dividend history as a stand alone company, along with the high PEmg and PB ratios.  The Enterprising Investor’s only initial concern is the level of debt relative to net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.18 in 2010 to an estimated $2.19 for 2014.  This level of demonstrated growth does not support the market’s implied estimate of 8.76% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Abbvie Inc. (ABBV) for greater perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Abbvie Inc. (ABBV)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Abbvie Inc. (ABBV) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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