AbbVie Inc.’s (NYSE:ABBV) price-to-earnings (or “P/E”) ratio of 20.8x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E’s below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, AbbVie has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report on AbbVie will help you uncover what’s on the horizon.
How Is AbbVie’s Growth Trending?
AbbVie’s P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered an exceptional 66% gain to the company’s bottom line. As a result, it also grew EPS by 11% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 36% per annum over the next three years. With the market only predicted to deliver 12% per annum, 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On AbbVie’s P/E
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
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.
You always need to take note of risks, for example – AbbVie has 4 warning signs we think you should be aware of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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