AbbVie Inc. (ABBV, Financial), a name I have felt is undervalued for some time, reported third-quarter earnings results Friday morning that easily topped Wall Street's estimates. The company also gave yet another double-digit dividend increase.
With all the positives going for the company, AbbVie still looks incredibly undervalued. This is why, in combination with the company's pipeline and high yield, I feel that AbbVie should be at the top of the list for investors looking for exposure to the health care industry.
Quarterly highlights
AbbVie's adjusted earnings per share of $2.83 was an increase of 50 cents, or 21.5%, from the previous year. This was also 6 cents better than Wall Street analysts had expected. Revenue increased 52.1% to $12.9 billion, topping estimates by $190 million.
Much of the change in revenue was due to the company's acquisition of Allergan earlier this year. On an adjusted basis, comparable sales improved 4.1%.
The immunology portfolio grew nearly 15% to $5.8 billion.
Humira sales were higher by 4.1% to $5.14 billion. U.S. sales were solid, with a gain of 7.7% to $4.2 billion. This was partially offset by a sales decline of 9.3% in international markets. International sales for Humira are facing biosimilar competition, which has eroded sales. The product will begin to face the same pressure in the U.S. beginning next year.
AbbVie has plenty in the tank to offset this.
Skyrizi, which is used to treat psoriasis, had $435 million in sales, an increase of more than 100% year over year and a 32% improvement from the second quarter. This product continues to increase its share of the market as Skyrizi is already used to treat a third of patients with psoriasis. Peak sales are expected in the $5 billion range.
Revenue for Rinvoq, a treatment for moderate and severe rheumatoid arthritis in adult patients, increased more than 100% to $$215 million. This product had 44% growth on a sequential basis. Rinvoq was introduced a little over a year ago, but already treats 16% of patients with rheumatoid arthritis. Peak sales are expected to reach $6.5 billion.
Skyrizi and Rinvoq had a combined six additional indications approved during the quarter, which allows AbbVie to cover the breadth of the $40 billion rheumatology market. Expected approvals in the next year for Skyrizi will give it access to the $20 billion inflammatory bowel disease market as well. This combined with market share these two drugs have already acquired gives both a long runway for growth. Combined sales for the year should top $2 billon.
AbbVie's hematologic oncology portfolio had sales of $1.7 billion, an improvement of nearly 17% from the previous year. This portfolio is expected to produce revenue of more than $6.5 billion in 2020, a double-digit improvement from the prior year.
Imbruvica revenues were up 9% to $1.4 billion due to gains in market share in the area of chronic lymphocytic leukemia even as new patient starts was once again lower due to Covid-19.
Venclexta, which is used to treat patients with relapsed leukemia, had global sales of $352 million, a 59% increase from the previous year due to higher uptake rates. This was also 16% higher than the prior quarter's result. Venclexta could generate peak sales of nearly $3 billion.
The aesthetic portfolio declined 3.1% to $967 million, but improved 70% from the second quarter. Botox Cosmetics fell 2.2% from the prior year, but has recovered well since the previous quarter.
Neuroscience revenue grew 12.1% on a comparable basis. Much of this growth came from a 48.4% increase in revenue for Vraylar, which treats schizophrenia and bipolar disorder. Leadership cites a better risk as a reason the drug continues to expand its market share in these two areas.
AbbVie also raised its full-year guidance for earnings per share. The company now expects adjusted earnings of $10.47 to $10.49 per share for 2020, up from $10.35 to $10.45 previously. Revenue is expected to reach $45.7 billion for the year, $200 million above the company's previous guidance.
In addition, AbbVie announced that it was raising its dividend by 10.2% to $1.30 for the Feb.16 payment. Double-digit growth is nothing new for the company as its dividend has compounded at a rate of 16.2% annually over the past five years. The dividend has grown 225% since AbbVie became an independent company in 2013.
The stock now has a forward dividend yield of 6.5%, considerably higher than its five-year average yield of 3.9% and higher than most of AbbVie's peers.
Humira sales were decent for the quarter, but what investors should really like about AbbVie is the growth of the company's other products. Even the products that the Allergan acquisition added, though down from third-quarter 2019, performed much better compared to the second quarter. Covid-19 has impacted this portfolio more so than the remainder of AbbVie's business.
AbbVie also gave another 10% dividend increase. With all of this going for it, the company deserves better than a single-digit earnings multiple.
Valuation
AbbVie closed Friday's trading session at $85.10. Based off of the midpoint for earnings per share estimates for the year, the stock has a forward price-earnings ratio of 8.1. This compares favorably to AbbVie's five-year average price-earnings ratio of 12.3.
This valuation also looks cheap compared to other drug manufacturers. Listed below are the current price-earnings ratios for several of the company's peers.:
- AstraZeneca (AZN): 25.3
- Bristol-Myers Squibb (BMY, Financial): 9.3
- Eli Lilly & Co. (LLY, Financial): 21.0
- Merck & Co. (MRK, Financial): 12.7
- Novartis AG (NVS, Financial): 13.5
- Pfizer (PFE, Financial): 12.0
- Sanofi (SNY, Financial): 13.1
None of the other larger drugmakers trade with a single-digit valuation.
I've stated several times that I feel AbbVie continues to be undervalued by the market, most likely due to the company's reliance on Humira and that product's upcoming loss of patent protection. This focus on Humira has taken attention away from the company's pipeline, which I take to mean that the market is ignoring AbbVie's other products and their potential for growth.
The GuruFocus Value chart also shows that AbbVie is trading below its intrinsic value.
AbbVie has a GF Value of $110.07, which means that the stock has a price-to-GF Value ratio of 0.77. The stock has a rating of modestly undervalued. Reaching this price would result in a 29% gain from the current share price.
Final thoughts
AbbVie's third quarter topped consensus estimates. Humira continues to have solid growth in the U.S., but struggled internationally. While this is the headline product for the company, AbbVie had strong growth rates in many of its newer products. This is expected to continue going forward given the tailwinds for many of the company's products.
AbbVie also continued its short, but steady history of raisings its dividend at a double-digit clip. The stock yields in excess of its average yield and offers a higher level of income then many other drug manufactures.
Shares of the company remain at a discount to their historical valuation. The GF Value verifies my belief that the market is undervaluing AbbVie.
Despite AbbVie being one of the larger positions in my personal portfolio, I am considering purchasing additional shares due to the combination of business results, valuation and high yield.
Disclosure: The author has a long position in AbbVie and Pfizer.
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