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 5 Undervalued Companies for the Defensive Investor. 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 Regeneron Pharmaceuticals Inc. fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Regeneron Pharmaceuticals, Inc. (Regeneron) is an integrated biopharmaceutical company, which discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions. As of December 31, 2011, the Company had two marketed products: EYLEA (aflibercept) Injection and ARCALYST (rilonacept) Injection for Subcutaneous Use. As of December 31, 2011, the Company had 13 product candidates in clinical development. Its Trap-based, late-stage programs are EYLEA, which is being developed for the treatment of additional serious eye diseases; ZALTRAP (aflibercept), known in the scientific literature as vascular endothelial growth factor (VEGF) trap, which is being developed in oncology in collaboration with Sanofi; and ARCALYST, which is being developed for the prevention of gout flares in patients initiating uric acid-lowering treatment.
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 – PASS
- 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 – 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 = 3/5
- 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 – FAIL
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$33.19|
|Value Based on 0% Growth||$19.45|
|Market Implied Growth Rate||59.11%|
|Net Current Asset Value (NCAV)||$8.00|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Regeneron Pharmaceuticals is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company has shown insufficient earnings stability or growth over the ten year historical period, does not pay dividends, and is trading at a high PEmg ratio. For the Enterprising Investor, the company’s lack of earnings stability and growth over the 5 year period is very concerning. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Amgen (AMGN) and ModernGraham’s valuation of Pfizer (PFE). From a valuation standpoint, the company appears significantly overvalued despite growing its EPSmg (normalized earnings) from -$1.23 in 2009 to $2.29 for 2013. This demonstrated level of growth still falls well below the market’s implied estimate of 59.11% earnings growth(!) and leads the ModernGraham valuation model to return an estimate of intrinsic value that is considerably lower than the market 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 Regeneron Pharmaceuticals (REGN)? 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.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Regeneron Pharmaceuticals (REGN) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.