When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider AbbVie Inc. (NYSE:ABBV) as a stock to avoid entirely with its 50.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
AbbVie has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for AbbVie
How Is AbbVie's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like AbbVie's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. Regardless, EPS has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Looking ahead now, EPS is anticipated to climb by 38% per year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.
In light of this, it's understandable that AbbVie's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that AbbVie maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
And what about other risks? Every company has them, and we've spotted 3 warning signs for AbbVie you should know about.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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About NYSE:ABBV
AbbVie
AbbVie Inc. discovers, develops, manufactures, and sells pharmaceuticals worldwide.
Reasonable growth potential average dividend payer.
