Abbvie: A long-term hold for me
Opdateret: 22. apr.
If you follow or copy me, you will probably already know that I think very highly of Abbvie. I have owned it for years and I see it as a stock that I will probably hold forever. It doesn't mean that it is a stock for you though. In this analysis I will go through the investment case of Abbvie and why it is part of my portfolio.
This is not a financial advice. I am not a financial advisor and I only do these posts to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
If you regularly read my posts on eToro, you would know that I often write about Abbvie, and that it is one of the larger positions in my portfolio. My view on Abbvie hasn't changed despite Warren Buffett closing his position in Q1 2022. For full disclosure, I need to let you know that I bought my first position in Abbvie in April 2020 and that is a company I really like. However, as always, I will not be biased in this analysis. One thing I should mention to begin with is that Abbvie bought Allergan in 2020, meaning that the numbers from 2020 and onwards will be a bit skewed.
So, what is Abbvie? It is an American biopharmaceutical company that was founded in 2013, as a spin-off of Abbott Laboratories. It is among the largest pharmaceutical companies in the world (8th largest in the world) and is located in Illinois, USA. As with all other pharmaceutical companies it is not difficult to determine a moat for Abbvie. All pharmaceutical companies, including Abbvie, have a secret moat due to their patents. Meaning that once you invest in pharmaceuticals you need to be up to date with their drugs, and their patents. Abbvie is most known for their drug Humira, which generated 19.832 million dollars in 2020, while their second largest selling drugs, Imbruvica, generated 5.314 million dollars in 2020.
Their CEO is Richard Gonzalez. He first joined Abbott Laboratories more than 30 years ago and had held various positions in the company before becoming the CEO of Abbvie when it was founded in 2013. Previously, there has been some controversy regarding Richard Gonzalez due to some misleading details about his credentials. The controversies were that Abbot Laboratories had stated that he had a bachelor's degree in biochemistry from the University of Houston and a master degree from the University of Miami. He did attend the University of Houston with a major in biochemistry but didn't earn his degree, and while he didn't study a master's degree at the University of Miami, he did serve as a research biochemist. All of this means that he doesn't have a college degree. The controversies regarding his credentials, and him fighting throat cancer made him briefly retire for some years in 2007 before returning to Abbott Laboratories. Educational credentials or not, his vast experience in the industry and his great results show that he is a great CEO. I mean Warren Buffett had no problem investing in Abbvie despite of this, and while you should do your own research, it is certainly comforting to know that someone that stress the importance of management, invested in the company.
I have determined that Abbvie has a strong secret moat. And despite the controversy, we like the management as well. Now let us investigate the numbers to see, if Abbvie does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. Ideally, you would like to see a ROIC above 10 % in all years. Abbvie has delivered a ROIC above the requirement in all years except one for the last 10 years. The only year they didn't deliver a ROIC above 10 % was in 2020, which was both a pandemic year and the year they acquired Allergan. It is encouraging to see that Abbvie delivered a high ROIC in 2022, and hopefully the trend continues. Hence, seeing numbers like this makes me very happy to be a shareholder in Abbvie.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The first thing to notice is that there are some years with negative growth. Both of them before Abbvie acquired Allergan, and since the acquisition, Abbvie has managed to grow their equity each year. Thus, despite the underwhelming years, I feel confident in Abbvie growing their equity moving forward.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. The numbers from Abbvie are very encouraging. Not surprisingly they have managed to deliver a positive free cash flow in each of the last 10 years. It is even more encouraging to see that the leveraged free cash flow margin has increased significantly from 2018 and onwards, and has continuously been above way above 30 %. The high free cash flow yield suggests that Abbvie is trading at a relative low valuation, but we get back to that later.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation on Abbvie, I can see that Abbvie has 5,02 years earnings in debt. It is higher than I would like to see but it is partly due to the acquisition of Allergan. The numbers are encouraging, as if you did the same calculations in 2020, it would take Abbvie 17 years to pay off debt.
Based on my findings so far, it is obvious that Abbvie is a great company. However, no investments are without risk and Abbvie has some risks as well. We already mentioned one risk, which is the debt. I don't want to go too much into it here, but you will need to see that Abbvie is paying off their debt each year. Another risk is that they lose their patent in the United States on Humira in 2023. As I wrote previously, Humira is by far their bestselling drug, and while they already have lost their patent in Europe, they will lose their patent in the United States in 2023, which is a concern. Management has said that the patent loss of Humira might not hit as hard as expected in 2023, however it will drag into 2024. Imbruvica revenue is declining. Imbruvica is their second largest product. Hence, it is not encouraging to see revenue declining. And it doesn't seem like the trend will change anytime soon as management predicts revenue to be flat in the next quarter. While some of the Imbruvica sales go to Venclexta, another drug from Abbvie, it isn't enough to make up for the sales loss of Imbruvica. Another risk is the reopening enrollment on the federal Affordable Care Act by Joe Biden. Obviously, it could be a risk for the whole pharmaceutical industry if Biden wants to lower the prescription drug pricing and limit price increases on drugs.
In this section I would like to address some of the risks and investigate the potential of Abbvie. I have already written about debt, so I won't go much into details with that here. If you invest in Abbvie, you must monitor that they keep being profitable and keep paying off some debt. Regarding Humira, it is certainly a valid concern. You cannot extent the patent, so to address the risk, you will need to investigate their pipeline. Two drugs that are expected to perform well for Abbvie in the future are Skyrizi and Rinvoq. Management expects the two drugs combined to contribute $15 billion to revenue by 2025. In 2022 Skyrizi revenue were up by 75,74 % compared to 2021 and Rinvoq revenue by 52,76 % compared to 2021. It means that the two products are in line to contribute as management expects. Another way to deal with the patent loss of Humira is the acquisition of Allergan. Allergan was known for their aesthetics division, most notably Botox. The aesthetics division is also growing their revenue slightly, as revenue was up by 1,9 % in 2022 compared to 2021. Management predicts long-term growth for the division because aesthetics is being destigmatized and is now seen more of a health and wellness product. Neuroscience grew revenue by 10,1 % in 2022 compared to 2021. In neuroscience Abbvie has two interesting products in Ubrelvy for acute migraine and Qulipta for migraine prevention. Management expects that neuroscience will continue to grow. Finally, let me shortly address the Affordable Care Act, and why I'm not too concerned about it. It is due to Medicare Part D that allows pharmaceutical companies to be reimbursed for drugs that do not provide value for money, and as you might have guessed, value for money is not further defined.
All right, we have gone through the numbers, potential and risk regarding Abbvie, and now it is time for us to calculate a price for Abbvie. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS at 6,63, which is the one from 2022. I chose an Estimated future EPS growth rate of 15 (it is lower than the 18,9 % that is forecasted at Finbox, but it is the highest I use), Estimated future PE 30 (which the double of the growth rate, as the historically PE for Abbvie has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $198,90, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Abbvie at price of $99,45 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 24.943. The Capital Expenditures was 695. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 486,5 in our further calculations. The Tax Provision was 1.632. We have 1.770 outstanding shares. Hence, the calculation will be like this: (24.943 - 486,5 + 1.632) / 1.770 x 10 = $147,39 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 13,72 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $216,58.
I believe that Abbvie is a great company with a good management. I believe they will do great in the future due to their pipeline. There are some concerns with patent loss of Humira in the United States and the declining sales of Imbruvica. However, Rinvoq and Skyrizi are growing according to plan and in combination with the growth of their aesthetics and neuroscience divisions, it should more than make up for the losses. Nonetheless, in the short-term the loss of the Humira patent will affect free cash flow, which is why I wouldn't put too much attention on the PAYBACK TIME price. Personally, I will consider adding to my Abbvie position if the stock falls below the TEN CAP price at $147,39, as I would get a 50 % discount on two out of three calculations.
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