AbbVie Inc (ABBV)

Conclusion

AbbVie is a research-based biopharmaceutical company that develops, manufactures and sells medicines in areas including immunology (Skyrizi, Rinvoq), blood cancers (Imbruvica, Venclexta), neuroscience and aesthetics (Botox). At a price of 293.30 USD, its market capitalisation is 518.4 billion USD.

The verdict is overvalued. The price trades at a P/E of 50.1 against a ten-year median of 29.3, a premium of 71.1%, and at a P/FCF of 27.5 against a median of 12.9, a premium of 113.3%. The discounted cash flow gives 253.91 USD per share at a discount rate of 8.87%. The fair value band runs from 170.16 to 255.23 USD with a midpoint of 212.70 USD, a margin of safety of -27.5%. The reverse DCF implies growth of 10.2% a year, while revenue has compounded at 5.9% over five years and free cash flow per share at 0.0%.

Strong returns support the case: a ROIC of 17.4% against a WACC of 8.1%, and free cash flow at 182.3% of net income over the last twelve months. The weakest numbers are the earnings per share decline, with a five-year compound rate of -2.9%, the valuation premium on free cash flow, and the current ratio of 0.87. The case would weaken if free cash flow stopped covering earnings or if the expected 15.8% growth in next year's earnings did not come through.

Financial health

Financial strength is yellow: the scorecard assesses all four measures as neutral, so none of them clearly supports or weakens the company. The current ratio is 0.87 and the quick ratio is 0.56, so short-term liabilities exceed liquid assets. Net debt is 2.9 times EBITDA, and interest is covered 6.1 times by operating earnings. Debt to equity is not available. The Altman Z-score is 2.68, in the grey zone, although the model was designed for manufacturers and AbbVie is only partly one. Insolvency risk is low, about 1.0% by the estimate of the Ohlson model over one to two years. Debt has fallen 10.5% a year over five years, which is a supportive trend.

Earnings quality

Earnings quality is green. Free cash flow conversion is 182.3% over the last twelve months and 282.9% over five years, and the accrual ratio is -0.11, so reported profit is well backed by cash. Stock-based compensation is 1.4% of revenue, and free cash flow after it is 17.9 billion USD. The share count has grown 1.2% a year over five years, so there have been no net buybacks. The Piotroski score is 7 out of 9 and the Beneish M-score is -2.88, which is consistent with no manipulation. The company beat earnings estimates in seven of the last eight quarters, with an average surprise of 1.9%. Estimate revisions are slightly negative: the current-year estimate fell 0.2% over 90 days, and the next-year estimate fell 0.8%.

Profitability

Profitability is green. The gross margin is 76.3% against a ten-year median of 70.1%, and the operating margin is 35.5% against 31.6%. The net margin is 15.7%, below its median of 18.1%. The operating margin stability measure is 24.7%. The most important figure is ROIC of 17.4% against a WACC of 8.1%, a ROIC minus WACC value of 9.2%, and the five-year median ROIC is 10.2%. The DuPont split shows a net margin of 6.9% and an asset turnover of 0.46, which is consistent with a business whose returns come from margins rather than volume. Return on equity is not available because the company reports negative shareholders' equity.

Growth

Growth is yellow. Revenue has compounded at 1.8% over three years, 5.9% over five years and 10.3% over ten years, and it grew in nine of the ten comparable years. Earnings per share have declined at a rate of -29.0% over three years, -2.9% over five years and -2.7% over ten years. Free cash flow per share has fallen 9.7% over three years, is flat over five years at 0.0%, and has grown 8.9% over ten years. The recent slowdown in revenue and the sharp three-year decline in earnings per share are the main concerns, while the consistency of revenue growth and the expected 15.8% growth in next year's earnings are the positives.

Valuation

Valuation is red. The P/E is 50.1 against a ten-year median of 29.3, a premium of 71.1%. EV/EBITDA is 24.4 against 19.6, a premium of 24.1%, and price to sales is 7.9 against 4.6, a premium of 70.9%. The earnings yield is 2.0% and the free cash flow yield is 3.6%. The DCF gives 253.91 USD per share at a discount rate of 8.87%, with the terminal value making up 59.1% of it. The fair value from historical multiples is 171.48 USD. The fair value band runs from 170.16 to 255.23 USD with a midpoint of 212.70 USD, a margin of safety of -27.5% at a price of 293.30 USD. The fair value is an order of magnitude built on fixed assumptions, not a price target. The dividend yield is 2.3% and the payout is 64.3% of free cash flow.

Risks

A fall in free cash flow would weaken the case most, because the company's cash generation is what supports its debt and its dividend. A current ratio below 1 and net debt of 2.9 times EBITDA leave little room for a fall in earnings. Continued declines in earnings per share would undermine the premium multiples. The valuation risk is the largest: at 27.5 times free cash flow and a margin of safety of -27.5%, the price already assumes growth of 10.2% a year, above the 5.9% revenue growth delivered over five years. Debt to equity and return on equity are not available. This analysis has no debt maturity schedule and no revenue breakdown by segment, so it cannot assess refinancing needs or which products drive growth.