AbbVie (NYSE: ABBV) is a drug company, which was spun off from Abbott in early 2013. It strives to have a remarkable impact on people's lives across several key therapeutic areas: immunology, oncology, neuroscience, eye care, virology, women's health and gastroenterology, in addition to products and services across its Allergan Aesthetics portfolio.   

Why Should Investors Book Profit? 

• Weak liquidity profile: In Q3 FY21, the company's current ratio was 1.01x compared to the industry median of 6.43x, while the quick ratio stood at 0.91x compared to the industry median of 4.20x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.

• Heavily leveraged: The company’s debt to equity ratio at the end of September 30, 2021, stood at 5.96x, which is too high against the industry median. Additionally, its % LT Debt to Total Capital stood at 78.5% against the industry median of 0.2%. These factors imply higher balance sheet risks.

• Higher Cash Cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 128.8 days compared to an industry median of 71.5 days.

• Stretched valuations: ABBV shares are available at an NTM EV/Sales multiple of 4.9x compared to the industry (Pharmaceuticals) median of 2.7x, while on NTM EV/EBITDA multiple, it is trading at 9.3x compared to the industry median of 5.8x. This implies that the shares are overvalued against the industry. The stock is trading at stretched valuations on multiple parameters. Higher valuations against an industry draws a caution line.

 Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine group 

Stock recommendation

The company continued to achieve strong results, with double-digit operational sales and EPS growth driven by a well-balanced portfolio. Despite the strong figures, the company failed to outperform on a number of key financial metrics that are critical to its long-term success. In Q3 2021, the company reported a poor liquidity profile, against an industry accompanied with longer cash cycle days. Even a higher debt profile indicates that the balance sheet is in jeopardy. Furthermore, on an NTM basis, the stock is trading at a premium to the industry on multiple parameters. Higher valuations versus an industry cast a shadow of doubt on investors' minds. In addition, technical indicators suggest that the stock price may consolidate or may make a correction from here. Hence, considering the aforesaid rationales, we have given a “Sell” recommendation in the stock at the current market price of USD 132.56 at 9:45 am Toronto Time on January 24, 2022.

One-Year Technical Price Chart (as on January 24, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.

Kalkine Media Limited, an affiliate of Kalkine Limited, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.