Streetwise for Sunday, April 9, 2017
Wall Street is like a spoiled child. Each time a piece of economic or corporate data is released that somehow does not meet its desires; the Street throws a temper tantrum and you know what happens then.
Taking advantage of the ensuing volatility, virtually every investment purveyor parrots the same party line, Utopia is just over the hill…but only they know which hill. Forget Utopia. You simply want to invest in companies with an intrinsic value above their share price and that have an excellent track record of performance in their field of endeavor.
Having your portfolio exceed the performance of one or more of the major equity indexes is known as relative performance. Yet, what really counts is absolute performance, or a minimum annual return that is over and above your original investment. Outperforming a negative index number with a less of a negative number is not acceptable.
To accomplish that goal, you need to select companies that you know and understand and whose future you, yourself, can foresee. Please note I said that you can foresee. I have deliberately left out letting a mutual fund manager decide your future, receiving ìhelpî from your friendly stock broker, or tips from Uncle Joe. They rarely work.
So, by now you are probably saying to yourself, how about an example to spring board your efforts. One company you might consider is AbbVie (ABBV). When I last wrote about the company a year ago, my 2016 earnings estimate was 5.10 per share, with an estimated 12-month share price of $71, for a capital gain of about 15 percent. So how did the company do?
Earnings came in at $4.82 per share and the shares recently closed at $64.96. Therefore, question now is whether we will once again see the $70 plus share price we saw in 2015, with a subsequent move to the upside.
Despite the disappointment on the earnings front, the company is still a reasonable contender for consideration. Its 3.94 percent dividend yield is generous and well covered by cash flow. However, at 17.9 times earnings on a trailing 12-month basis, the shares could not be called cheap.
A key concern is AbbVie’s ability to diversify away from Humira before its patents expire. In the past, AbbVie has undertaken a few small acquisitions in addition to some organic growth in the arena of new drug development. Yes, AbbVie does have an impressive portfolio of ‘de-risked’ pharmaceutical assets, meaning assets in ‘Stage 3’ or later in the FDA approval process.
As a result, the company should be able to plug the gap of Humira coming off patent by 2020, and maintain and possibly even grow revenue after that. These new drugs include Imbruvica, Venclexta, Rova-T and ABT-494, Abbott’s Jak-1 inhibitor.
Although there is a bit of a leap of faith in the company’s ability to diversify itself and continue to grow, in the past AbbVie has had far fewer things in its pipeline than it does now.
Meanwhile, AbbVieís 2017 guidance is good. Midpoint earnings per share (EPS) guidance calls for a 13.9 percent growth, with top line revenue set to increase another 10 percent. Last year’s results were also reasonable with EPS increasing by 12.4 percent, while revenue grew 13.3 percent.
Yes, the increase was led by Humira, which increased worldwide sales by over 16 percent. Nevertheless, AbbVie generates considerable excess cash flow, and the dividend is just a little over 50 percent of trailing free cash flow.
The company’s prospects for the future and its prospects for plugging the gap that will occur when Humira comes off patent remain reasonable. However, you will also have a degree of confidence in CEO Rick Gonzalez and the rest of the management team.
To be sure, AbbVie has had its share of setbacks since it was spun off from Abbott Laboratories in 2013, including the failed attempt to buy drug maker Shire and soft sales for its hepatitis C drug Viekira Pak.
The intrinsic value of the shares using a free cash flow to the firm model is $67. My earnings estimate for 2017 is $5.50 per share with a projected 12-month share price of $71, for a 10 percent capital gain, plus the 3.94 percent dividend yield.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.