Mallinckrodt PLC Valuation – July 2018 $MNK

Company Profile (excerpt from Reuters): Mallinckrodt public limited company, incorporated on January 9, 2013, develops, manufactures, markets and distributes branded and generic specialty pharmaceutical products and therapies. The Company focuses on various therapeutic areas, such as autoimmune and rare disease specialty areas, including neurology, rheumatology, nephrology, ophthalmology and pulmonology; immunotherapy and neonatal critical care respiratory therapies; analgesics and hemostasis products, and central nervous system drugs. The Company’s segments include Specialty Brands and Specialty Generics. The Specialty Brands segment produces and markets branded pharmaceutical products and therapies. The Specialty Generics segment produces and markets specialty generic pharmaceuticals and active pharmaceutical ingredient (API) consisting of biologics, medicinal opioids, synthetic controlled substances, acetaminophen and other active ingredients.


Downloadable PDF version of this valuation:

ModernGraham Valuation of MNK – July 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,497,013,565 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.10 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 1187.74% Pass
6. Moderate PEmg Ratio PEmg < 20 2.07 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 0.25 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.10 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 5.38 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass


Stage 2: Determination of Intrinsic Value

EPSmg $9.02
MG Growth Estimate 15.00%
MG Value $347.24
Opinion Undervalued
MG Grade C+
MG Value based on 3% Growth $130.78
MG Value based on 0% Growth $76.66
Market Implied Growth Rate -3.22%
Current Price $18.66
% of Intrinsic Value 5.37%

Mallinckrodt PLC does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $-0.55 in 2014 to an estimated $9.02 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.22% annual earnings loss over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Mallinckrodt PLC revealed the company was trading below its Graham Number of $101.32. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 2.07, which was below the industry average of 40.6, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-78.4.

Mallinckrodt PLC receives an average overall rating in the ModernGraham grading system, scoring a C+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$78.40
Graham Number $101.32
PEmg 2.07
Current Ratio 2.10
PB Ratio 0.25
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2018
Total Current Assets $2,304,700,000
Total Current Liabilities $1,098,500,000
Long-Term Debt $6,491,500,000
Total Assets $15,516,500,000
Intangible Assets $12,627,800,000
Total Liabilities $9,055,200,000
Shares Outstanding (Diluted Average) 86,100,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.04
Dec2017 $21.80
Sep2016 $5.77
Sep2015 $2.75
Sep2014 -$4.92
Sep2013 $1.02
Sep2012 $2.33
Sep2011 $2.61

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $9.02
Dec2017 $8.77
Sep2016 $1.96
Sep2015 $0.29
Sep2014 -$0.55
Sep2013 $1.48
Sep2012 $1.47
Sep2011 $0.87

Recommended Reading:

Other ModernGraham posts about the company

Mallinckrodt PLC Valuation – August 2016 $MNK
5 Speculative and Overvalued Companies to Avoid – July 2015
Mallinckrodt PLC Analysis – Initial Coverage $MNK

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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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