Despite Some Concerns, AbbVie Stock Is Still Worth A Look

Biopharmaceutical giant, AbbVie (NYSE:ABBV) faces a major headwind in 2023. Its blockbuster drug, Humira, comes off patent and there are a number of alternative biosimilar drugs due for release.

The company has two other immunology offerings, Skyrizi and Rinvoq, which are expected to post sales growth that will offset revenue losses associated with reduced sales of Humira. AbbVie management provided encouraging forward guidance on the revenue outlook for these two drugs in mid-January.

Shares in ABBV have taken off since early November, with a 3-month total return of 23.8%, buoyed by strong earnings in Q4 and FDA approvals. The 12-month total return for ABBV is 44.04%.

Source: Investing.com

ABBV has generated extremely steady EPS growth in recent years. Over the past four years, it has beaten the consensus expected level in every quarter except one—Q4 of 2018. These results provide confidence in management’s forward guidance.

Green (red) values indicate amount by which the quarterly EPS beat (missed) the consensus expected value. Source: E-Trade

I last wrote about ABBV on Sept. 13, 2021, when the shares were trading at about $107. The shares had declined primarily due to concerns about the announcement that a new warning label would be required for Rinvoq.

Even as the market sold off, there were two significant bullish indicators. The first was the Wall Street consensus outlook for ABBV that suggested the shares had substantial upside. The second was the market-implied outlook, a probable forecast that represents that consensus among buyers and sellers of options.

Considering these two bullish outlooks, the (then) forward dividend yield of 4.85%, and modest valuation, I maintained my bullish rating on ABBV. One of the concerns with looking at the Wall Street consensus outlook is that the analysts take time to respond to new developments and, as such, may be somewhat out-of-date. The market responds to news in real time, so I put extra emphasis on the market-implied outlook.

Today, ABBV is trading at about $144 and the total return (including dividends) since Sept. 13 is 37.6%.

While most readers will be familiar with the Wall Street consensus, many will not have encountered the market-implied outlook. The price of an option on a stock reflects the options market’s consensus estimate of the probability that the stock price will rise above (call option) or fall below (put option) a specific level (the option strike price) between now and when the option expires. By analyzing the prices of call and put options at a range of strike prices, all with the same expiration date, it is possible to calculate a probable price forecast that reconciles the options prices. This is the market-implied outlook. This approach has a substantial body of research behind it. I rely on both the Wall Street consensus outlook and the market-implied outlook.

With the recent price gains, ABBV’s current dividend yield is 4.1% and the TTM P/E is 34.4. The yield continues to be attractive, albeit not especially high compared with other major drug firms.

For context, Amgen (NASDAQ:AMGN), Gilead (NASDAQ:GILD) and Merck (NYSE:MRK) have yields of 3.4%, 4.8% and 3.6%, respectively. The 3- and 5-year annualized dividend growth rates for ABBV are 10.4% and 17.7%, respectively.

Wall Street Consensus Outlook For AbbVie

E-Trade calculates the Wall Street consensus outlook using the views of 18 ranked analysts who have published ratings and price targets over the past 90 days. The consensus rating is bullish, but the consensus 12-month price target is only 2.8% above the current share price.

Source: E-Trade

Investing.com’s version of the Wall Street consensus is based on the views of 25 analysts. The results are very similar to those from E-Trade, with a bullish rating and a consensus 12-month price target that is 2.8% above the current share price.

Source: Investing.com

I look at two versions of the Wall Street consensus because there can be substantial differences, depending on the specific cohort of analysts selected. In this case, the results are almost identical. With the substantial gains in ABBV in recent months, the Wall Street consensus suggests that there is little additional upside potential.

When I wrote about ABBV in September, the Wall Street consensus rating was also bullish, but the consensus 12-month price target was 19% above the share price at that time.

Market-Implied Outlook For ABBV

I have calculated the market-implied outlook for ABBV for the 4-month period from now until June 17, and for the 11.2-month period from now until Jan. 20, 2023, using options that expire on these two dates. I chose these two option expiration dates to provide a view to the middle of 2022 and through the full year.

The standard presentation of the market-implied outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade

The outlook to the middle of June is generally symmetric, with comparable probabilities of positive and negative returns, although the peak in probability is tilted to favor positive returns and corresponds to a price return of +2.5% for this 4-month period. The annualized volatility calculated from this outlook is 25%.

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

The negative return side of the distribution has been rotated about the vertical axis. Source: Author’s calculations using options quotes from E-Trade

This view shows that the probabilities of positive returns are consistently slightly higher than for negative returns of the same magnitude for a wide range of the most probable outcomes (the solid blue line is above the dashed red line over almost all of the left two-thirds of the chart above). This tilt in probabilities is interpreted as slightly bullish.

The market-implied outlook is expected to have a negative bias because risk-averse investors tend to pay more than fair value for downside protection. While this bias cannot be estimated directly, the potential for bias reinforces the bullish view for ABBV for the next four months.

The market-implied outlook for the next 11.2 months, from now until Jan. 20, 2023, has almost perfectly matching probabilities for positive and negative returns of the same size, except for two types of outcomes. For returns in the range of +/-5% (the far left side of the chart), the probabilities of negative returns are elevated. There is also a slightly elevated probability of very large negative returns (the far right side of the chart), although these outcomes occur with very low probability. The expected volatility calculated from this distribution is 27%.

Considering the expected negative bias, this outlook appears slightly bullish, although less than the shorter-term outlook.

The negative return side of the distribution has been rotated about the vertical axis. Source: Author’s calculations using options quotes from E-Trade

Overall, the market-implied outlook is slightly bullish to the middle of the year, becoming more neutral for the full year. The expected volatility is 25% for the first half of 2022 and is slightly higher for the full year. Nothing in the market-implied outlooks signals any particular cause for concern. In my September post, I showed a 4.3-month market-implied outlook. The 4-month outlook to June 17 exhibits a stronger bullish tilt than the 4.3-month outlook from September.

Summary

While ABBV is expected to lose substantial revenue from Humira in 2023, this risk is well understood and may already be priced into the shares.

The Wall Street consensus outlook is bullish, although the recent gains have brought the share price very close to the consensus 12-month price target. Adding the expected price appreciation of 2.8% to the 4.1% dividend brings the expected total return to 6.9% over the next year.

This is not much return relative to the expected volatility. The market-implied outlook to the middle of 2022 is slightly bullish and the outlook to mid-January of 2023 is less bullish, heading towards neutral.

I am maintaining my bullish rating on ABBV for the time being, but there are concerns on the horizon. I plan to re-evaluate around the middle of 2022. For those who are long ABBV, and especially for investors with unrealized gains that would result in a tax liability for selling, selling covered calls may be worth considering.