Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Enterprising Investor – November 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Mylan Inc. (MYL) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Mylan Inc. (Mylan) is a global pharmaceutical company, which develops, licenses, manufactures, markets and distributes generic, branded generic and specialty pharmaceuticals. Mylan operates in two segments: Generics and Specialty. The Company’s generic pharmaceutical business is conducted primarily in the United States and Canada (collectively, North America); Europe, the Middle East, and Africa (collectively, EMEA); and India, Australia, Japan and New Zealand (collectively, Asia Pacific). Its specialty pharmaceutical business is conducted by Mylan Specialty L.P. (Mylan Specialty). The Company’s API business is conducted through Mylan Laboratories Limited (Mylan India), which is included within the Asia Pacific region in its Generics Segment. Mylan provides products to customers in approximately 140 countries and territories.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$30.40|
|Value Based on 0% Growth||$17.82|
|Market Implied Growth Rate||9.52%|
|Net Current Asset Value (NCAV)||-$15.02|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Mylan Inc. is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned by the low current ratio, the lack of earnings stability over the last ten years, lack of dividend payments and the high PEmg and PB ratios. The Enterprising Investor is concerned by the level of debt relative to the current assets along with the lack of dividend payments. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.28 in 2010 to only an estimated $2.10 for 2014. This level of demonstrated growth is greater than the market’s implied estimate of 9.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Mylan Inc. (MYL)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Mylan Inc. (MYL) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.