At the initial phase of an analysis, Allergan appears suitable for the Enterprising Investor but not the Defensive Investor due to the lack of earnings stability over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor’s only initial concern is the lack of earnings stability over the last five years. Defensive Investors should look to other opportunities while Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
The company has shown strong growth in raising its EPSmg (normalized earnings) from $1.10 in 2010 to an estimated $3.88 for 2014. However, the market is implying an earnings growth rate of 19.30% for the next 7-10 years. Such a rate is not sustainable for such a long period, and the ModernGraham model caps the growth rate at 15% as part of a margin of safety. As a result, the model returns an estimate of intrinsic value falling below the current price, indicating the company is overvalued at the present time.
Be sure to check out previous ModernGraham valuations of Allergan Inc. for more perspective!