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 – July 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 stock analysis showing a specific look at how Mallinckrodt PLC (MNK) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Mallinckrodt public limited company (Mallinckrodt) is a global specialty pharmaceuticals company. The Company develops, manufactures, markets and distributes both branded and generic specialty pharmaceuticals, active pharmaceutical ingredients (API) and diagnostic imaging agents. The Company uses its API products in the manufacture of its generic pharmaceuticals and also sells them to other pharmaceutical companies. The Company operates through two segments: Specialty Pharmaceuticals and Global Medical Imaging. The Company’s Specialty Pharmaceuticals segment develops, manufactures and sells, through its Brands business, drugs, including EXALGO (hydromorphone HCl) Extended-Release Tablets and GABLOFEN. The Company’s Global Medical Imaging segment develops, manufactures and markets contrast media and delivery systems (CMDS). The Company offers INOMAX Total Care (inhaled nitric oxide), a neonatal critical care product.
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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 -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â 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 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 -Â FAIL
- 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 -Â FAIL
Enterprising Investor – must pass at least 4Â of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â FAIL
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
Valuation Summary
Key Data:
| Recent Price | $125.65 |
| MG Value | $19.55 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $16.34 |
| Value Based on 0% Growth | $9.58 |
| Market Implied Growth Rate | 51.51% |
| Net Current Asset Value (NCAV) | -$46.15 |
| PEmg | 111.52 |
| Current Ratio | 2.86 |
| PB Ratio | 2.84 |
Balance Sheet – March 2015
| Current Assets | $2,219,000,000 |
| Current Liabilities | $776,000,000 |
| Total Debt | $3,966,000,000 |
| Total Assets | $12,814,000,000 |
| Intangible Assets | $9,285,000,000 |
| Total Liabilities | $7,628,000,000 |
| Outstanding Shares | 117,200,000 |
Earnings Per Share
| 2015 (estimate) | $5.25 |
| 2014 | -$4.92 |
| 2013 | $1.02 |
| 2012 | $2.33 |
| 2011 | $2.61 |
Earnings Per Share – ModernGraham
| 2015 (estimate) | $1.13 |
| 2014 | -$0.55 |
| 2013 | $1.48 |
| 2012 | $1.47 |
| 2011 | $0.87 |
Dividend History
Mallinckrodt does not pay a dividend.
Free Cash Flow
Conclusion:
Mallinckrodt PLC does not qualify for either the Defensive Investor and the Enterprising Investor.  The Defensive Investor is concerned with the short history as a stand alone company, lack of dividends, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the level of debt relative to the net current assets, the lack of dividends, and the lack of earnings stability over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $0.87 in 2011 to an estimated $1.13 for 2015.  This level of earnings growth does not support the market’s implied estimate of 51.51% annual earnings growth over the next 7-10 years, and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling below the price.
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 Mallinckrodt PLC (MNK)?  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 any 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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