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 Most Undervalued Companies for the Defensive Investor – February 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 Regeneron Pharmaceuticals Inc. (REGN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Regeneron Pharmaceuticals, Inc. (Regeneron) is a biopharmaceutical company that discovers, invents, develops, manufactures and commercializes medicines for the treatment of serious medical conditions. Regeneron develops new product candidate using VelociSuite technology platforms. Regeneron’s discovery platforms are designed to identify specific proteins of therapeutic interest for a particular disease or cell type and validate these targets through high-throughput production of genetically modified mice using the Company’s VelociGene technology to understand the role of these proteins in normal physiology, as well as in models of disease. The Company also has human monoclonal antibody technology, VelocImmune and cell line expression technology VelociMab. Regeneron’s antibody product candidates in clinical trials were developed using VelocImmune. The Company has three marketed products: EYLEA, ZALTRAP and ARCALYST.
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||$43.19|
|Value Based on 0% Growth||$25.32|
|Market Implied Growth Rate||71.44%|
|Net Current Asset Value (NCAV)||$7.34|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Regeneron does not pay a dividend.
Regeneron Pharmaceuticals is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the lack of dividends, insufficient earnings growth or stability over the last ten years along with the high PEmg and PB ratios. The Enterprising Investor is concerned with the lack of dividends and 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. As for a valuation, the company appears to be overvalued despite growing its EPSmg (normalized earnings) from a loss of $1.18 in 2010 to a gain of $2.98 for 2014. This level of growth does not support the market’s implied estimate of 71.44% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.
Be sure to check out previous ModernGraham valuations of Regeneron Pharmaceuticals (REGN) 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 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.
Disclaimer: The author did not hold a position in Regeneron Pharmaceuticals (REGN) 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.