AbbVie has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9.7% to $249.64 per share while the index has gained 13.5%.
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Why Does AbbVie Spark Debate?
Born from a 2013 spinoff of Abbott Laboratories' pharmaceutical business, AbbVie (NYSE: ABBV) is a biopharmaceutical company that develops and markets medications for autoimmune diseases, cancer, neurological disorders, and other complex health conditions.
Two Positive Attributes:
1. Economies of Scale Give It Negotiating Leverage with Suppliers
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With $64.39 billion in revenue over the past 12 months, AbbVie is one of the most scaled enterprises in healthcare. This is particularly important because therapeutics companies are volume-driven businesses due to their low margins.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
AbbVie has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the healthcare sector, averaging an eye-popping 34.8% over the last five years.
One Reason to Be Careful:
Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, AbbVie’s 3.7% annualized revenue growth over the last five years was tepid. This wasn’t a great result compared to the rest of the healthcare sector, but there are still things to like about AbbVie.
Final Judgment
AbbVie’s positive characteristics outweigh the negatives. At $249.64 per share (or 16.3× forward P/E), is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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