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AbbVie Provides Outlook For 2015

Chase’s presentation on January 14, 2015 at the JPMorgan (NYSE:JPM) HealthCare Conference.

Since AbbVie has been in the news a lot lately due its announcement of the launch of its new hepatitis C virus treatment Viekira Pak., that competes directly with Gilead Sciences’ (NASDAQ:GILD) hepatitis C ("HCV") treatment Sovaldi and its successor, Harvoni, I thought it would be interesting to perform a free cash flow analysis of AbbVie, using my "Scorecard System". The analysis will start on the date that AbbVie was split off from Abbott Laboratories (NYSE:ABT) in 2013. Once completed, this analysis should give everyone a clearer understanding on how accurate the valuation is (and has been) that Wall Street has assigned the company relative to its actual Main Street performance.

Here are the financial results for AbbVie for the years 2013 2015/TTM:

(click to enlarge)

Since I am a conservative investor, I analyze companies using the last final print data from the previous year, which each company is required to report (10 K filing) to the SEC (Securities Exchange Commission). Thus, in the table above the market capitalization that you see for the year 2013 is from March 23rd of that year, while the other data listed is year end December 31, 2012, as that is the data that would have actually been released by all firms by the March date. For investors that like to use forward estimates, I have also included the TTM (Trailing Twelve Months) data as well for 2015.

Before we show you the final results of our free cash flow analysis for AbbVie, here is a brief introduction to what each of the three ratios, which make up my system as well as what the final "Scorecard" score means.

CapFlowCapFlow is the name I have given to the ratio (Capital Expenditures/Cash Flow). CapFlow allows us to see how much capital spending (or capital expenditures, CAPEX) a company must employ in relation to its cash flow to maintain itself and more importantly grow the company. This ratio is extremely useful as it is both a qualitative and quantitative ratio in that it acts as a laser beam into the inner workings of a company. Quite simply, if a company is increasing its profits and doing so by spending less money relative to its growth in cash flow, it should, in theory, outperform on Main Street. When you can have such an occurrence for more than a few years in a row, it clearly shows you have a wonderful management in place that knows what it is doing.

The ideal again is to consistently have a CapFlow of less than 33% and avoid any company, like the plague, that has a CapFlow of over 100%, as in such a case, Management is spending more in capital expenditures than it is bringing in from cash flow from operations. That is a recipe for disaster in my opinion. Just using this ratio alone will narrow your list of potential candidates for investment substantially and will give you an easy to use tool for judging management effectiveness.

FROICFROIC = Free Cash Flow Return on Invested Capital

FROIC= Free cash flow/ (long term debt + shareholders equity)

FROIC basically tells us how much return in free cash flow a company generates for every one dollar of "Total Capital" it employs. I consider FROIC the primary determining factor in identifying growth companies as one can compare every company on an equal basis using this ratio.

The question I ask every company I analyze is:

How much return (in percent) in free cash flow are you going to give us for every dollar of total capital you invest?

A FROIC of 20% or more is considered excellent and the higher the result the better. Since long term debt is included in the invested capital part of the equation, one can see quite clearly by using this ratio, on just how well or how poorly Management is managing its debt.

FREE CASH FLOW YIELDFree Cash Flow Yield = Free Cash Flow per Share/ Market Price per Share

Free cash flow yield is the amount of free cash flow a company generates on Main Street divided by what Wall Street thinks the company is worth at any given moment. So, basically once you learn this simple tool, you won’t care much what others think about a stock anymore as you yourself will have gone a long way in determining just how powerful a stock is relative to its stock market price and whether its stock price is justified, way overvalued or undervalued.

Having used the Free Cash Flow Yield a zillion times over the years, I have come up with these conservative parameters for my own investing.

For the more Aggressive as well as the "Buy Hold" investor, I would adjust everything down a notch and for example would make the hold from 2% to 5.9% and the buy from 6% to 9.9% and sell anything under 2%. As for shorting a stock that would be any result under zero, including any negative result. Here is a listing of those parameters for easy reference.

SCORECARDFinally, we come to the final score for any company under analysis and this is done by combining the three ratio final results into one analysis, we grade each company with either a passing score of 1 or a failing score of 0 per ratio where a perfect final score per stock would be a 3.

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