Pharmaceuticals Stocks

Vertex Pharmaceuticals Annual Valuation – 2014 $VRTX

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 Highest Dividend Yields Among Undervalued Companies for the Enterprising 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 Vertex Pharmaceuticals (VRTX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Vertex Pharmaceuticals Incorporated (Vertex) is in the business of discovering, developing, manufacturing and commercializing small molecule drugs for the treatment of serious diseases. The Company’s two products are INCIVEK (telaprevir), which is approved for the treatment of patients with genotype 1 hepatitis C virus (HCV), infection, and KALYDECO (ivacaftor), which is approved in the United States for the treatment of patients six years of age and older with cystic fibrosis (CF), who have at least one copy of the G551D mutation in the cystic fibrosis transmembrane conductance regulator (CFTR), gene. The Company has ongoing clinical programs involving drug candidates intended for the treatment of HCV infection, CF, rheumatoid arthritis, influenza and epilepsy. INCIVEK (telaprevir) achieved initial commercial acceptance following its approval in May 2011. It started marketing KALYDECO in the United States in January 2012.

VRTX Chart

VRTX data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  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 – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  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 = 3/5

  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 – FAIL
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $93.77
MG Opinion Overvalued
Net Current Asset Value (NCAV) $1.96
Current Ratio 3.83
PB Ratio 17.99

Balance Sheet – 3/31/2014

Current Assets $1,430,300,000
Current Liabilities $373,500,000
Total Debt $522,900,000
Total Assets $2,197,100,000
Intangible Assets $31,000,000
Total Liabilities $966,200,000
Outstanding Shares 236,200,000

Earnings Per Share

2014 (estimate) -$3.28
2013 -$1.98
2012 -$0.50
2011 $0.14
2010 -$3.77
2009 -$3.71
2008 -$3.27
2007 -$3.03
2006 -$1.84
2005 -$2.28
2004 -$2.12

Earnings Per Share – ModernGraham

2014 (estimate) -$1.95
2013 -$1.52
2012 -$1.60
2011 -$2.34
2010 -$3.43
2009 -$3.11

Conclusion:

 

Vertex Pharmaceuticals does not qualify for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has major concerns with the lack of earnings stability over the last ten years, the lack of dividends, the insufficient earnings growth, and the high PEmg and PB ratios. The Enterprising Investor has concerns with the lack of dividend payments and the insufficient earnings stability over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities such as through a review of ModernGraham’s valuation of Johnson & Johnson (JNJ) and ModernGraham’s valuation of Bristol-Myers Squibb (BMY). As for a valuation, the company appears significantly overvalued considering it has not earned a profit in all but one of the last ten years. Such a demonstrated result does not fare well in the ModernGraham valuation model, based on Benjamin Graham’s valuation formula.

 

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 Vertex Pharmaceuticals (VRTX)?  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 Vertex Pharmaceuticals (VRTX) 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.

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