Pharmaceuticals Stocks

Mallinckrodt PLC Valuation – August 2016 $MNK

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 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  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 stock analysis showing a specific look at how Mallinckrodt PLC (MNK) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Mallinckrodt public limited company (Mallinckrodt) is engaged in the specialty pharmaceuticals and nuclear imaging business. The Company develops, manufactures, markets and distributes specialty pharmaceutical and biopharmaceutical products, and nuclear imaging agents. The Company’s segments include Specialty Brands, Specialty Generics and Nuclear Imaging. Its Specialty Brands segment produces and markets branded pharmaceutical and biopharmaceutical products for autoimmune and rare diseases; immunotherapy and neonatal respiratory critical care therapies, and central nervous system drugs. Its Specialty Generics segment produces specialty generic pharmaceuticals and active pharmaceutical ingredients (API) consisting of biologics, medicinal opioids, synthetic controlled substances, acetaminophen and other active ingredients. Its Nuclear Imaging segment manufactures and markets radiopharmaceuticals (nuclear medicine).

MNK Chart

MNK data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MNK – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $8,035,560,137 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.68 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 14833.33% Pass
6. Moderate PEmg Ratio PEmg < 20 33.19 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.57 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.68 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 9.56 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MNK value chart August 2016

EPSmg $2.26
MG Growth Estimate 7.99%
MG Value $55.27
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $32.73
MG Value based on 0% Growth $19.19
Market Implied Growth Rate 12.34%
Current Price $74.92
% of Intrinsic Value 135.55%

Mallinckrodt PLC does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.47 in 2012 to an estimated $2.26 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 12.34% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Mallinckrodt PLC revealed the company was trading below its Graham Number of $85.08. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 33.19, which was below the industry average of 38.69, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-82.25.

Mallinckrodt PLC receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

MNK charts August 2016

Net Current Asset Value (NCAV) -$82.25
Graham Number $85.08
PEmg 33.19
Current Ratio 1.68
PB Ratio 1.57
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

 

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $1,626,300,000
Total Current Liabilities $969,500,000
Long-Term Debt $6,279,000,000
Total Assets $15,833,200,000
Intangible Assets $12,904,000,000
Total Liabilities $10,624,400,000
Shares Outstanding (Diluted Average) 109,400,000

Earnings Per Share History

Next Fiscal Year Estimate $6.65
Sep2015 $2.75
Sep2014 -$4.92
Sep2013 $1.02
Sep2012 $2.33
Sep2011 $2.61

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.26
Sep2015 $0.29
Sep2014 -$0.55
Sep2013 $1.48
Sep2012 $1.47
Sep2011 $0.87

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – July 2015
Mallinckrodt PLC Analysis – Initial Coverage $MNK

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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