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Allergan Inc. Quarterly Valuation – February 2015 $AGN

220px-AllerganBenjamin 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 Most Undervalued Companies for the Defensive Investor – January 2015.  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 Allergan Inc. (AGN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Allergan, Inc. is a multi-specialty health care Company focused on developing and commercializing pharmaceuticals, biologics, medical devices and over-the-counter products. The Company discovers, develops and commercializes a range of products for the ophthalmic, neurological, medical aesthetics, medical dermatology, breast aesthetics, urological and other specialty markets. The Company operates through its two business segments: specialty pharmaceuticals and medical devices. The specialty pharmaceuticals segment produces pharmaceutical products, including: ophthalmic products; 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 urologics products. The medical devices segment produces a range of medical devices, including: breast implants for augmentation, revision and reconstructive surgery and tissue expanders, and facial aesthetics products.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  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 - PASS
  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 - PASS
  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 = 4/5

  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 - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $224.69
MG Value $140.78
MG Opinion Overvalued
Value Based on 3% Growth $53.02
Value Based on 0% Growth $31.08
Market Implied Growth Rate 26.47%
Net Current Asset Value (NCAV) $7.23
PEmg 61.45
Current Ratio 4.41
PB Ratio 8.85

Balance Sheet – December 2014

Current Assets $6,871,000,000
Current Liabilities $1,557,000,000
Total Debt $2,085,000,000
Total Assets $12,416,000,000
Intangible Assets $4,179,000,000
Total Liabilities $4,663,000,000
Outstanding Shares 305,400,000

Earnings Per Share

2014 $5.01
2013 $3.26
2012 $3.58
2011 $3.01
2010 $0.00
2009 $2.03
2008 $1.84
2007 $1.62
2006 -$0.44
2005 $1.51
2004 $1.41

Earnings Per Share – ModernGraham

2014 $3.66
2013 $2.78
2012 $2.39
2011 $1.76
2010 $1.10
2009 $1.53

Dividend History

Conclusion:

Allergan Inc. is suitable for the Enterprising Investor but not for the Defensive Investor.  The Defensive Investor is concerned by the insufficient earnings stability over the last ten years as well as the high PEmg and PB ratios.  The Enterprising Investor is only concerned by the lack of earnings stability over the last five years.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.10 in 2010 to $3.66 for 2014.  While strong, this level of demonstrated growth does not support the market’s implied estimate of 26.47% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

Be sure to check out previous ModernGraham valuations of Allergan Inc. (AGN) for greater perspective!

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 Allergan Inc. (AGN)?  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 Allergan Inc. (AGN) 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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