AbbVie Inc. (NYSE:ABBV) shares are up more than 56.64% this year and recently increased 0.35% or $0.34 to settle at $98.09. Heron Therapeutics, Inc. (NASDAQ:HRTX), on the other hand, is up 42.75% year to date as of 12/27/2017. It currently trades at $18.70 and has returned 8.41% during the past week.
AbbVie Inc. (NYSE:ABBV) and Heron Therapeutics, Inc. (NASDAQ:HRTX) are the two most active stocks in the Drug Manufacturers – Major industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ABBV to grow earnings at a 15.19% annual rate over the next 5 years. Comparatively, HRTX is expected to grow at a 34.85% annual rate. All else equal, HRTX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. AbbVie Inc. (ABBV) has an EBITDA margin of 40.46%. This suggests that ABBV underlying business is more profitable ABBV’s ROI is 18.00% while HRTX has a ROI of -540.90%. The interpretation is that ABBV’s business generates a higher return on investment than HRTX’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ABBV’s free cash flow (“FCF”) per share for the trailing twelve months was +1.32. Comparatively, HRTX’s free cash flow per share was -0.75. On a percent-of-sales basis, ABBV’s free cash flow was 8.22% while HRTX converted -3.76% of its revenues into cash flow. This means that, for a given level of sales, ABBV is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. ABBV has a current ratio of 1.50 compared to 2.10 for HRTX. This means that HRTX can more easily cover its most immediate liabilities over the next twelve months. ABBV’s debt-to-equity ratio is 5.65 versus a D/E of 0.71 for HRTX. ABBV is therefore the more solvent of the two companies, and has lower financial risk.
ABBV trades at a forward P/E of 15.09, a P/B of 23.41, and a P/S of 5.74, compared to a P/B of 25.27, and a P/S of 44.57 for HRTX. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. ABBV is currently priced at a -2.4% to its one-year price target of 100.50. Comparatively, HRTX is -39.68% relative to its price target of 31.00. This suggests that HRTX is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for ABBV and 1.70 for HRTX, which implies that analysts are more bullish on the outlook for ABBV.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. ABBV has a beta of 1.53 and HRTX’s beta is 2.10. ABBV’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. ABBV has a short ratio of 2.55 compared to a short interest of 10.01 for HRTX. This implies that the market is currently less bearish on the outlook for ABBV.
AbbVie Inc. (NYSE:ABBV) beats Heron Therapeutics, Inc. (NASDAQ:HRTX) on a total of 8 of the 14 factors compared between the two stocks. ABBV is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, ABBV is the cheaper of the two stocks on book value and sales basis, Finally, ABBV has better sentiment signals based on short interest.