ABBVIE Stock- Investors Appear Satisfied With AbbVie Inc.’s (NYSE:ABBV) Prospects
With a price-to-earnings (or “P/E”) ratio of 38.6x AbbVie Inc. (NYSE:ABBV) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E’s lower than 11x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
AbbVie hasn’t been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
NYSE:ABBV price Based on Past Earnings June 8th 2021
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How Is AbbVie’s Growth Trending?
In order to justify its P/E ratio, AbbVie would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 48%. As a result, earnings from three years ago have also fallen 27% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 43% per year over the next three years. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.
With this information, we can see why AbbVie is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of AbbVie’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 4 warning signs for AbbVie that we have uncovered.
If you’re unsure about the strength of AbbVie’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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