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 companyÂ or by reviewing theÂ 5 Undervalued Companies for the Defensive Investor.Â 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 Allergan Inc. (AGN)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Allergan, Inc. is a multi-specialty health care Company focused on developing and commercializing pharmaceuticals, biologics, medical devices and over-the-counter products. The Companyâ€™s segments include specialty pharmaceuticals, which produces a range of pharmaceutical products, including ophthalmic products for dry eye, glaucoma, inflammation, infection, allergy and retinal disease; Botox for certain therapeutic and aesthetic indications; skin care products for acne, psoriasis, eyelash growth and other prescription and over-the-counter skin care products; and urologic products and the medical devices segment, which produces a range of medical devices, including breast implants for augmentation, revision and reconstructive surgery and tissue expanders; obesity intervention products, and facial aesthetics products. In April 2014, TauTona Groupâ€™s subsidiary Aline Aesthetics has completed the sale of its Aline hyaluronic acid (HA) thread technology to Allergan, Inc.
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 -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â 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 -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â 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 = 4/5
- 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 – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$59.75|
|Value Based on 0% Growth||$35.03|
|Market Implied Growth Rate||16.52%|
|Net Current Asset Value (NCAV)||$4.55|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Allergan Inc. is suitableÂ for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the lack of earnings stability over the last ten years and the high PEmg and PB ratios. Â The Enterprising Investor’s only initial concern is the lack of earnings stability over the last five years. Â As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities including a review of ModernGraham’s valuation of Eli Lilly & Co. (LLY).Â From a valuation side of things, the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $1.11 in 2010 to an estimated $4.12 for 2014. This level of demonstrated growth supports the marketâ€™s implied estimate of 16.52% earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
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 Allergan Inc. (AGN)? 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.
Disclaimer: Â The author did not hold a position in Allergan Inc. (AGN)Â orÂ 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. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.