Investors, like the entire the market, and like all of us seem anxious to find some kind, any kind of reason to see hope in the future – either for the prospect of seeing some form of a “return to normal” for the U.S. at large. Get the kids going back to school, churches open for worship, sports leagues to start competing again, and businesses to get things restarted. There is always a point where I think we tire of the same commentary and narrative over and over again, and it’s probably safe to say we reached that point a long time ago when it comes to COVID-19. The market finishes the week on a high note, using news from the Fed on a dramatic increase in liquidity being pumped into the market via avenues designed to provide relief to small and mid-size companies of all types in the near term, along with indications that the infection rate may be slowing in critical areas like New York as big catalysts.
I’m not one that likes to beat the “gloom and doom” drum hard, or even at all; but being an objective investor means that you have to try to filter through a lot of noise – about the market, the economy, and the world. With that in mind, I think it is important to frame what most of us would correctly want to treat as good news in a big-picture sense. The truth is that some of the really critical aspects of winning the battle against COVID-19 – namely, finding useful antivirals and developing actual vaccines – have yet to be realized. That means that risk of infection is still out there and isn’t likely to abate in the near term. That means that the need to self-isolate, and practice social distancing is still going to be a fact of life. That means that restarting the economy will be a gradual process, not a “flip the switch” kind of event. As an investor, that ultimately means that it probably isn’t the right time yet to get too enthusiastic. Caution is still key, which also means that finding practical places to put your money right now is going to continue to be a challenge.
Over the last couple of weeks, I’ve been turning my attention more and more to the Healthcare sector, simply because over the weeks and months ahead, I continue to believe that useful opportunities in regular sectors, like Technology, Industrials, and Consumer Discretionary are going to be hard to find and generally offer more risk than reward. Even in favorable sectors, however, it is important to be careful about where you cast your net. It’s true to say that not all stocks are created equal, and that certainly applies to stocks within the same sector. One of the stocks that crossed my desk recently is AbbVie Inc. (ABBV), a pharmaceutical giant that you might tempted to lump in with other stocks in its industry right now. That would be a mistake; they aren’t actively working on any treatments that would be useful in the COVID-19 fight right now, and while that isn’t necessarily a bad thing, it does underscore the narrow nature of the company’s focus.
The lion’s share of their revenues, and profits come from a single hepatitis drug, Humira, the formula for which will legally become available in 2023. That puts a ticking clock on the company to diversity its revenues before biosimilar drugs (a.k.a. generics) begin to erode market share. That urgency is at least part of the reason behind last year’s announcement of a $63 billion dollar acquisition of Allergan plc (AGN), expected to close sometime before midyear. That should be useful, but integration is always a complex process, and it isn’t a given it will provide the long-term benefit management expects. The market pushed the stock more than -30% low from late February to the last week of March, but from that point the principle of “a rising tide lifts all boats” has helped the stock ride the wave of institutional interest in the pharma space to an increase of almost 28%. Do the stock’s fundamentals and value proposition make it useful? Let’s find out.
Fundamental and Value Profile
AbbVie Inc. (AbbVie) is a research-based biopharmaceutical company. The Company is engaged in the discovery, development, manufacture and sale of a range of pharmaceutical products. Its products are focused on treating conditions, such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease and multiple sclerosis; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis, and other serious health conditions. It offers products in various categories, including HUMIRA (adalimumab), Oncology products, Virology Products, Additional Virology products, Metabolics/Hormones products, Endocrinology products and other products, which include Duopa and Duodopa (carbidopa and levodopa), Anesthesia products and ZINBRYTA (daclizumab). ABBV’s current market cap is $117.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 16.3%, while sales were 4.8% higher. In the last quarter, earnings dropped -5% while sales managed to increase 2.65%. Countering that unremarkable earnings pattern is the reality that ABBV is a company with a very healthy, even strengthening margin profile. In the last quarter, Net Income as a percentage of Revenues was 32.18% versus 23.6% in the last twelve months.
Free Cash Flow: ABBV’s free cash flow is strong, at $12.7 billion. This translates to a free cash flow yield of 10.8%.
Debt to Equity: ABBV is one of the most highly leveraged companies in the pharmaceutical industry. Their balance sheet shows $62.9 billion in long-term debt, of which a major portion came in the last quarter, presumably to help provide the funds to complete the AGN acquisition. The company does also have generally solid liquidity, with $39.9 billion in cash and liquid assets as well. Their operating profile suggests that servicing their debt shouldn’t be a problem.
Dividend: ABBV pays an annual dividend of $4.72 per share, which translates to a yield of about 5.92% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $33 per share. That means the stock is significantly overvalued, with -59% downside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the stock’s price activity over the last two years. The red diagonal line traces the stock’s downward trend through most of the period, when it reached a bottom at around $62.50 in September of 2019 and then again just last month after a temporary rally into the mid-$90 range early in the year. From that bottom, the stock has risen nicely to its current price a little below $80 per share. In fact, it is currently sitting right on resistance from the 38.2% Fibonacci retracement line at around $79.75, with with near-term support in the $74 to $75 range. A continued push above $80 could be a useful bullish catalyst, with next support around $85 per share, and $90 from that point using the 50% and 61.8% retracement lines as reference points. If the stock drops below $74, however, it could fall quickly to next support anywhere between its 52-week low at $62.50 and $64.
Near-term Keys: It might be tempting, given the size and pace of the stock’s rally since March 26, to chase ABBV, and the fundamentals in this case are very strong. If you’re thinking about using ABBV as a smart coronavirus play, though, it really doesn’t fit the bill. It’s also clear that, fundamental strength notwithstanding, ABBV does not offer any kind of useful value proposition. That means the best opportunities to work with this stock really lie with short-term trading strategies. If the stock can keep pushing higher, and move above $80, you could take that as a strong signal to buy the stock or to work with call options, with $85 as a useful bullish profit target. If momentum reverses, and ABBV falls below $74, you might consider shorting the stock or buying put options, with an eye on $64 as a good exit point on a bearish trade.