AbbVie: A long-term hold for me
Opdateret: 7. aug.
If you follow me regularly, 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 explain why it is a 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. If you want to copy my portfolio or accessing information about the stocks I own, you can find detailed instructions on how to do so here. 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 purchased my initial position in AbbVie in April 2020, and it is a company that 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 acquired Allergan in 2020, which means that the numbers from 2020 and beyondwill be somewhat distorted. If you want to purchase shares or fractional shares of AbbVie, you can do so through eToro.eToro is very user-friendly and easy to set up.
AbbVie is a pharmaceutical company that was founded in 2013 as a spin-off of Abbott Laboratories. It is one of the largest pharmaceutical companies in the world (ranked 2nd largest) 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 stay updated on their therapies and patents. AbbVie is most known for their drug Humira, which generated 21.237 million dollars in sales in 2022. Their second largest selling drug, Skyrizi, generated 5.165 million dollars in sales in the same year.
Their CEO is Richard Gonzalez. He first joined Abbott Laboratories more than 30 years ago and held various positions in the company before becoming the CEO of Abbvie when it was founded in 2013. Previously, there has been somecontroversy regarding Richard Gonzalez due to misleading details about his credentials. The controversy was that AbbottLaboratories had stated that he had a bachelor's degree in biochemistry from the University of Houston and a master'sdegree from the University of Miami. He did attend the University of Houston with a major in biochemistry but didn't earn his degree. Although he didn't pursue a master's degree at the University of Miami, he did work as a researchbiochemist. This implies that he does not possess a college degree. The controversies regarding his credentials and his battle with throat cancer led him to briefly retire in 2007 before returning to Abbott Laboratories. Regardless of his educational credentials, his extensive industry experience and impressive results demonstrate that he is a great CEO. Warren Buffett had no problem investing in AbbVie despite this. While you should do your own research, it is certainlycomforting to know that someone who stresses the importance of management has previously invested in the company.
AbbVie has a strong competitive advantage. And despite the controversy, I also appreciate the management. Now, let us examine the numbers to determine if Abbvie meets our criteria 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 invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. AbbVie has delivered a return on invested capital (ROIC) above the required level in all years except one for the past 10 years. The only year they did not deliver a return on invested capital (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 (Return on Invested Capital) in 2022, and hopefully the trend continues. Hence, seeing numbers like this makes me very happy to be a shareholder in AbbVie.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. The first thing to notice is that there are some years with negative growth. Both of them were separate entities before AbbVie acquired Allergan. Since the acquisition, AbbVie has successfully increased its equity every year. Thus, despite the underwhelming years, I feel confident in AbbVie's ability to grow their equity moving forward.
Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to 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 onwards and has consistently remained above 30%. The high free cash flow yield suggests that AbbVie is trading at a relatively low valuation, but we will discuss that later.
Another important aspect to investigate is the level of debt, specifically whether a business has a manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. Doing the calculation on AbbVie, I can see that AbbVie has 5,02 years of 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. If you were to perform the same calculations in 2020, it would have taken Abbvie 17 years to pay off its debt.
Based on my findings so far, it is evident that AbbVie is a great company. However, no investments are without risk, and AbbVie has some risks as well. We have already mentioned one risk, which is 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 will lose their patent for Humira in the United States in 2023. As I mentioned earlier, Humira is their top-selling drug. Although they have already lost the patent in Europe, the expiration of their patent in the United States in 2023 is a cause for concern. Management has stated that the impact of Humira's patent loss in 2023 may not beas severe as initially anticipated in 2023, but it is expected to continue into 2024. Imbruvica's revenue is declining. Imbruvica is their fourth-largest product. Hence, it is discouraging to see revenue declining. And it doesn't seem like the trend will change anytime soon, as management predicts that revenue will remainflat in the next quarter. While some of the Imbruvica sales go to Venclexta, another drug from AbbVie, it is not sufficientto compensate for the sales decline of Imbruvica. Another risk is the reopening enrollment on the federal. The Affordable Care Act by President Biden. Obviously, it could pose a risk to the entire pharmaceutical industry if Biden intends to reduce prescription drug prices and restrict price hikes on medications..
In this section, I would like to address the potential of AbbVie. Two therapies 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 was up by 75,74% compared to 2021, and Rinvoq revenue increased by 52,76% compared to 2021. It means that the two products are aligned and expected to contribute as management expects. Another way to address the patent expiration of Humira is through the acquisition of Allergan. Allergan was known for itsaesthetics division, most notably Botox. The aesthetics division is also experiencing slight revenue growth, with a 1,9% increase in revenue in 2022 compared to 2021. Management predicts long-term growth for the division because aesthetics are being destigmatized and are now seen as more of a health and wellness product. Neuroscience revenue grew by 10,1 % in 2022 compared to 2021. In neuroscience, Abbvie has two interesting products:Ubrelvy for acute migraine and Qulipta for migraine prevention. Management expects that neuroscience will continue to grow. Finally, let me briefly address the Affordable Care Act and explain why I'm not too concerned about it. It is due to Medicare Part D that pharmaceutical companies are reimbursed for drugs that do not provide value for money. However, the term "value for money" is not further defined.
All right, we have gone through the numbers, potential, and risk regarding Microsoft, and now it is time for us to calculate a price for Microsoft. To calculate the price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website. I don't want to go through the entire calculation here. I chose to use an EPS of 6,63, which is from 2022. I chose an estimated future EPS growth rate of 15% (which is lowerthan the 18.9% forecasted at Finbox, but it is the highest I use). I also selected an estimated future PE of 30 (which is double the growth rate, as the historical PE for Abbvie has been higher). Additionally, we have already established the minimum acceptable return rate at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $198,90. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Abbvie at a price of $99,45 (or lower, obviously) if we use the Margin of Safety price.
Our second method for calculating a purchase price is the Ten Cap price, which is also explained in "MY STRATEGY".To do so, we need some numbers from their financials. Keep in mind that all numbers are in millions. The operating cash flow last year was 24.943. The capital expenditures were 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. As a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that 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 as follows: (24.943 - 486,5 + 1.632) / 1.770 x 10 = $147,39 in Ten Cap price.
The final calculation is the Payback Time. I also described in "MY STRATEGY". With AbbVie's Free Cash Flow Per Share at 13,72 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $216,58.
AbbVie is a great company with strong management. I believe they will do great in the future due to their pipeline. There are some concerns regarding the loss of patent for Humira in the United States and the declining sales of Imbruvica. However, Rinvoq and Skyrizi are growing as expected. In addition, with the growth of their aesthetics and neurosciencedivisions, it is anticipated that these gains will more than compensate for the losses. Nonetheless, in the short term, the loss of the Humira patent will affect free cash flow. That is why I wouldn't pay too much attention to the Payback Time price. Personally, I will consider adding to my AbbVie position below the Ten Cap price of $147,39, as I would get a 50% discount on two out of three calculations.
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