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Comparing AbbVie Inc. (ABBV) and Analog Devices, Inc. (ADI)

AbbVie Inc. (NYSE:ABBV) shares are up more than 8.90% this year and recently increased 0.27% or $0.28 to settle at $105.32. Analog Devices, Inc. (NASDAQ:ADI), on the other hand, is up 6.75% year to date as of 05/17/2018. It currently trades at $95.04 and has returned 1.82% during the past week.

AbbVie Inc. (NYSE:ABBV) and Analog Devices, Inc. (NASDAQ:ADI) 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.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect ABBV to grow earnings at a 17.27% annual rate over the next 5 years. Comparatively, ADI is expected to grow at a 8.26% annual rate. All else equal, ABBV’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 34.36% for Analog Devices, Inc. (ADI). ABBV’s ROI is 25.40% while ADI has a ROI of 5.30%. The interpretation is that ABBV’s business generates a higher return on investment than ADI’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. ABBV’s free cash flow (“FCF”) per share for the trailing twelve months was +0.87. Comparatively, ADI’s free cash flow per share was +0.42. On a percent-of-sales basis, ABBV’s free cash flow was 4.89% while ADI converted 3.04% 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 provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. ABBV has a current ratio of 1.20 compared to 1.80 for ADI. This means that ADI can more easily cover its most immediate liabilities over the next twelve months. ABBV’s debt-to-equity ratio is 10.49 versus a D/E of 0.72 for ADI. ABBV is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ABBV trades at a forward P/E of 11.81, a P/B of 47.23, and a P/S of 5.66, compared to a forward P/E of 16.62, a P/B of 3.39, and a P/S of 6.23 for ADI. 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ABBV is currently priced at a -9.13% to its one-year price target of 115.90. Comparatively, ADI is -7.85% relative to its price target of 103.14. This suggests that ABBV is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ABBV has a beta of 1.62 and ADI’s beta is 1.24. ADI’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 2.62 compared to a short interest of 3.92 for ADI. This implies that the market is currently less bearish on the outlook for ABBV.

Summary

AbbVie Inc. (NYSE:ABBV) beats Analog Devices, Inc. (NASDAQ:ADI) on a total of 9 of the 14 factors compared between the two stocks. ABBV is growing fastly, 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 an earnings and sales basis, ABBV is more undervalued relative to its price target. Finally, ABBV has better sentiment signals based on short interest.

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