Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
2017 has been a good year for owners of AbbVie (ABBV 0.42%) stock. Shares of the big pharma (market cap: $141.6 billion) are up more than 40% over the past year -- and up more than twice as much as the rest of the S&P 500. But now here's the best news of all: According to the analysts at Boston-based investment banker Leerink Partners, AbbVie stock is poised to keep on outperforming the S&P 500 for some time to come.
Here are three things you should know about that.
1. What Leerink said
Leerink Partners announced this morning that it is upgrading shares of AbbVie stock to outperform and assigning the stock a $106 price target. If the analyst is right about that, investors today stand to earn about a 19% profit on the stock, on top of AbbVie's already rich 2.9% dividend yield.
In part, Leerink's rating is a reaction to news last week that AbbVie has resolved its legal dispute with Amgen (AMGN 0.93%) over the latter's proposed biosimilar product, Amjevita. AbbVie is granting Amgen a non-exclusive license to use AbbVie's intellectual property relating to its top-selling Humira arthritis treatment. In exchange for the license, Amgen will acknowledge "the validity of AbbVie's intellectual property related to" Humira. Amgen will also pay (an undisclosed amount of) royalties to AbbVie for use of its intellectual property -- and Amgen is agreeing not to sell Amjevita in the U.S. before 2023.
That's part of the reason Leerink is impressed with AbbVie today -- but it's not the whole reason.
2. Lots to like about AbbVie
In addition to Humira, AbbVie boasts a strong portfolio of drugs, including Imbruvica (to treat leukemia), Viekira Pak (hepatitis C), and Kaletra and Norvir (HIV). It also has arguably the third best pipeline of upcoming drugs in big pharma, including:
- upadacitinib (JAK1) for treating arthritis,
- risankizumab (IL-23) for psoriasis,
- and elagolix (GnRH) for endometriosis.
As Leerink explains in a note covered on StreetInsider.com (requires subscription) this morning, all three of these drugs "will emerge from phase III [clinical trials] over the next 12 months, and have the potential to contribute collectively $6bn in product sales by 2023E" -- the date that Amgen's Amjevita will finally come to market in the U.S.
3. Still growing fast
As my fellow Fool Keith Speights pointed out last month, AbbVie has grown its earnings at a 17% compound rate over the last five years, but had been expected to slow that growth rate down to about 14% over the next five years. Now, though, with the Amgen deal in its pocket, and new drugs ready to issue from the pipeline, Leerink thinks AbbVie might be able to eke out a bit more growth.
Leerink is projecting 15% annual earnings growth through at least 2021, which the analyst notes is above average for large-cap pharmaceutical makers and biopharmas as well.
What it means to investors
Combine Leerink's projected 15% earnings growth rate with AbbVie's dividend yield of nearly 3%, and you're looking at a total return of nearly 18% -- not an obvious bargain for a stock that costs 22 times trailing earnings today, but not a bad valuation. And it's even possible AbbVie could outperform Leerink's expectation. After all, AbbVie grew at a 17% rate over the past five years, and it's projected to accelerate -- not slow down -- next year, with analysts projecting 18.5% earnings growth in 2018.
Tack on a little bit of profit from Amgen's royalty payments (pursuant to the companies' settlement, Amgen is permitted to sell Amjevita "in most countries in the European Union" beginning in late 2018), and AbbVie might even surpass 18.5% growth next year.
Granted, a quick glance at the valuation is just the starting point for evaluating AbbVie stock -- you also need to weigh the company's $30.3 billion net debt load, for example. But for now, it's a propitious start.