Abbott Spinoff Analyzed

I spent some time this weekend taking a deeper look at the spin-off of Abbott’s (ABT) pharmaceutical unit, AbbVie Inc. (ABBV). For every share of Abbott at the close of business on December 12, 2012, investors will receive one share of AbbVie common stock. Abbott expects that AbbVie stock will be distributed on Jan. 1, 2013. AbbVie will trade on a “when issued” basis this Monday, December 10, 2012 under the symbol ABBV.WI.

AbbVie

AbbVie generates most of Abbott’s profit. For 2012, it will have between $5 – $6 billion in FCF or around $3.50/share. Earnings and revenue are growing. However, they are highly dependent on one drug, Humira. The patent for Humira expires in late 2016. As a result, AbbVie is a bit risky. Future growth, after Humiras patent expires, will depend on it finding new drugs.

The company expects to pay an annual dividend of $1.60/share. I expect the stock to trade around 12 to 13 times earnings or around $45. At this price, it should give a nice dividend of 3.5%. I personally would not want to own this stock because of the dependent on Humira.

Abbott

Abbott looks interesting post spin-off. The company expects operating cash flow of $4 billion after spin-off. If you factor in depreciation, interest expense, taxes and other expenses, Abbott’s FCF should be around $2 billion.

Abbott has market leading products across their different segments. It expects to grow revenue in mid-to-high-single-digits in 2013. Earnings could grow faster due to margin improvements. I expect it to trade around 15 times earnings or $20/share+.

Conclusion

Once AbbVie trades on a “when issued” basis this Monday, we should find out what the market thinks of the value of AbbVie. I think new Abbott will be a steal at any significant discount to my $20 fair value.

Disclosure: I do not own Abbott.

3 thoughts on “Abbott Spinoff Analyzed

  1. Love the update. Thanks for sharing your view. As I have posted before I couldn’t agree more.

    Have you ever considered doing a post on DST? Looks to be undervalued on a sum of the parts basis and seems quite motivated to begin selling off its non-core assets. I think that a ~$70 per share would be a conservative fairly valued share price.

    • It looks like the market really does not like AbbVie. It is trading today at $35. 10 times FCF. It will have near a 5% dividend yield. I wonder if naive investors will bid it up because of the dividend yield.
      That means Abbott is worth $30+. Although, I like Abbott, it seems expensive at over 20 times earnings.

      I have not looked at DST and will if I get some time.

      • Couldn’t agree more. Disappointing because I think the new ABT would have offered a great investment opportunity. Perhaps investors will feel similarly about the new ABT being overvalued at 20x, and shares will get oversold following the spinoff providing a decent entrance point. Regardless I may have to exit my ABT position sooner than I wished.

        Disappointing nonetheless. As always, thanks for your opinion and quick updates.

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