AbbVie (NYSE: ABBV) is a research-based biopharmaceutical company, which engages in the development and sale of pharmaceutical products. The company was founded in 2013 and is headquartered in North Chicago, IL.
AbbVie's stock is trading at $162.2, as of 29 Mar 2022, and is up by 20% year-to-date (YTD). Over the past year, the stock is up by 52% whilst the S&P 500 is up by 16%, meaning the stock has outperformed the market by approximately 36% over this period.
Is AbbVie stock a good investment? Let’s take a closer look and see what the numbers tell us.
Why are fundamentals important?
‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of an organization as well as its growth prospects. Over the long term, the price of a company's stock is usually tied to its fundamentals. It makes sense then to start by analysing these when we are considering if it has the makings of a good long-term investment.
There are a number of fundamental metrics to look at, but the ones we'll focus on are price to earnings ratio (P/E ratio), price to book value (P/BV), price to sales ratio (P/S ratio), earnings per share (EPS) and debt. When they are analyzed together, these metrics can start to 'paint the picture' and help you understand if a company is a solid investment.
With this in mind, let's take a look at AbbVie’s fundamentals and see if they can tell us anything about the company’s potential as an investment opportunity.
AbbVie's fundamentals
A good place to start is to look at AbbVie's EPS, which will tell us how profitable the company is on a 'per share' basis. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing this by the number of outstanding shares.
AbbVie's EPS is 6.5 based on its most recent financials, and year-on-year, this grew by 137%, which is encouraging.
Analyzing a company's price to earnings (P/E) ratio is also helpful because it tells us how cheap or expensive a stock is, or how much of a premium investors are willing to pay for its earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
ABBV has a P/E ratio of 25.1, based on its most recent financial statements. This is 32% higher than the average P/E ratio across its industry (which is 19) and indicates that the stock may be overvalued compared to companies in the same sector at present.
Next, let's look at the P/S ratio, which looks at a company's stock price compared to its sales (revenues). It is calculated as the current price divided by sales for the previous 12 months, and is useful because it helps us understand how much investors are willing to pay for every dollar of a company's revenues. The consensus opinion is that stocks with a lower P/S ratio offer better value, and stocks with a very low P/S ratio are known as 'value stocks'. However, what is considered a 'high' or 'low' P/S Ratio is relative and can vary across different sectors, so the best way to objectively assess this is to compare a company against its industry peers.
Based on its most recent financial statements, AbbVie's P/S ratio is currently 5.1. Compared to the sector-wide average of 4.7, this is 9% higher, indicating that the stock may offer less value compared to other companies in the same sector.
Another key metric to look at is a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
AbbVie's P/BV is 18.6 according to its most recent financials, which is 205% higher than the industry benchmark of 6.1.
Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
According to its most recent financial statements, AbbVie has total debt of $77.6bn, and this has gone down by 11% over the past year. The company also has cash & short-term investments totalling $9.8bn, giving it a 'net debt' of $67.7bn.
Based on these figures, there's no denying that AbbVie's current levels of net debt are a bit higher than we would like to see. The company might be relying on debt a bit too much so this is something to keep an eye on.
Is AbbVie a buy?
All in all, we’ve noticed some reassuring trends at AbbVie, but some are quite worrying.
On the one hand, the stock is up by 20% YTD and up by 52% over the past year. On the other hand, ABBV has a higher P/E ratio, higher P/BV and higher P/S ratio compared to companies in the same sector. And whilst it's good to see the company is showing positive EPS growth y/y, we can't ignore the fact that so many of the other metrics we looked at are higher than the industry average.
With this in mind, we think that AbbVie is one for the watchlist.
Please note that this analysis is general in nature and whether AbbVie is a good investment for you will depend on your specific investing objectives, personal circumstances and risk tolerance. This analysis is based on historical data and does not take into account the wider macroeconomic environment, geopolitical issues or individual technicalities in the way a company conducts its business which can have a significant impact on a its long-term outlook. Please conduct your own due diligence on AbbVie before deciding to invest.