Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Pfizer Inc. fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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. The Companyâ€™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. Primary Care operating segment includes revenues from human prescription pharmaceutical products primarily prescribed by primary-care physicians. In November 2012, the Company acquired NextWave Pharmaceuticals, Inc. On November 30, 2012, the Company completed the sale of its Nutrition business.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- 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 = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$19.08|
|Value Based on 0% Growth||$11.19|
|Market Implied Growth Rate||8.07%|
|Net Current Asset Value (NCAV)||-$6.18|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Pfizer Inc. is suitable for the Enterprising Investor but not the Defensive Investor. Â The company has not sufficiently grown its earnings over the last ten years for the Defensive Investor, and it currently trades at high PEmg and PB ratios. Â However, it passes all of the requirements for the Enterprising Investor, so that investor type should keep the company on a watch list going forward. Â In addition, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into both the company and other opportunities, including a review of ModernGraham’s valuation of Merck & Co. (MRK) as well as 5 Outstanding Dow Components. Â From a valuation perspective, the company appears to be overvalued after only growing its EPSmg (normalized earnings) from $1.23 in 2009 to $1.32 for 2013. Â This very low level of historically demonstrated growth does not support the market’s implied estimate for earnings growth of 8.07%, leading the ModernGraham valuation model to return an estimate for intrinsic value that falls well below the market price at this time.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Pfizer Inc. (PFE)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Pfizer Inc. (PFE) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.