AbbVie (ABBV): Buy, Sell, or Hold Post Q4 Earnings?

Over the past six months, AbbVie has been a great trade, beating the S&P 500 by 5.6%. Its stock price has climbed to $233.25, representing a healthy 11.2% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

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Why Does ABBV Stock 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 Things to Like:

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 $61.16 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

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

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 36.3% over the last five years. AbbVie has shown terrific cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders.

One Reason to be Careful:

Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, AbbVie’s 6% annualized revenue growth over the last five years was mediocre. 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, and with its shares beating the market recently, the stock trades at 16.2× forward P/E (or $233.25 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.

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