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ModernGraham Valuation: Pfizer Inc. (PFE)

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Company Profile (obtained from Google Finance): Pfizer Inc. (Pfizer) is a research-based, global biopharmaceutical company. The Company manages its operations through five segments: Primary Care; Specialty Care and Oncology; Established Products and Emerging Markets; Animal Health and Consumer Healthcare, and Nutrition. The Company’s diversified global healthcare portfolio includes human and animal biologic and small molecule medicines and vaccines, as well as nutritional products and consumer healthcare products. Its Animal Health business unit discovers, develops and sells products for the prevention and treatment of diseases in livestock and companion animals. On August 1, 2011, it completed the sale of its Capsugel business. In October 2011, it acquired Icagen, Inc. In December 2011, it acquired the consumer healthcare business of Ferrosan Holding A/S. In December 2011, it acquired Excaliard Pharmaceuticals, Inc. In November 2012, the Company acquired NextWave Pharmaceuticals, Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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 – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. 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 = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $16
MG Opinion Overvalued
Value Based on 3% Growth $20
Value Based on 0% Growth $12
Market Implied Growth Rate 7.21%
Net Current Asset Value (NCAV) -$5.87
PEmg 22.92
Current Ratio 2.92
PB Ratio 2.61

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $59,500,000,000
Current Liabilities $20,373,000,000
Total Debt $31,812,000,000
Total Assets $175,521,000,000
Intangible Assets $82,949,000,000
Total Liabilities $97,552,000,000
Outstanding Shares 6,481,070,000

Earnings Per Share – Diluted

2013 (estimate) $1.78
2012 $1.26
2011 $1.11
2010 $1.02
2009 $1.23
2008 $1.19
2007 $1.18
2006 $1.52
2005 $1.03
2004 $1.44
2003 $0.22
2002 $1.47

Earnings Per Share – Modern Graham

2013 (estimate) $1.37
2012 $1.16
2011 $1.13
2010 $1.16
2009 $1.23
2008 $1.25

Conclusion:

Pfizer is a strong company based solely on its balance sheet, but the earnings growth has not been strong enough for the Defensive Investor.  Since 2008, the EPSmg (normalized earnings) has only grown from $1.25 to an estimated $1.37 for 2013.  As a result of this lackluster growth, coupled with the fact the company is currently trading at a high PEmg ratio, the company is not suitable for Defensive Investors.  However, the company does pass all of the requirements of the Enterprising Investor, whom is able to take on additional risk by doing substantially more research than his Defensive Investor counterpart.  From a valuation standpoint, the ModernGraham valuation model indicates that the company is overvalued at the present time.  Once again this comes back to the lack of earnings growth; if the company doesn’t grow its earnings, it will not be rewarded by the valuation model.  The market is implying a growth rate of over 7% when EPSmg have grown at just over 2%.  As a result, Pfizer may not be the best opportunity for investment at this time and any individual considering entering a position should do further research.

What do you think?  Is Pfizer overvalued?  Should the company only be considered suitable for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Pfizer at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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