ModernGraham Valuation Of Pfizer

| About: Pfizer Inc. (PFE)

Here is a look at how Pfizer (NYSE:PFE) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

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 - PASS
  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 - FAIL
  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 = 5/5

  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 - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $16
MG Opinion Overvalued
Value Based on 3% Growth $20
Value Based on 0% Growth $12
Market Implied Growth Rate 7.21%
Net Current Asset Value (NCAV) -$5.87
PEmg 22.92
Current Ratio 2.92
PB Ratio 2.61

Balance Sheet - 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $59,500,000,000
Current Liabilities $20,373,000,000
Total Debt $31,812,000,000
Total Assets $175,521,000,000
Intangible Assets $82,949,000,000
Total Liabilities $97,552,000,000
Outstanding Shares 6,481,070,000

Earnings Per Share - Diluted

2013 (estimate) $1.78
2012 $1.26
2011 $1.11
2010 $1.02
2009 $1.23
2008 $1.19
2007 $1.18
2006 $1.52
2005 $1.03
2004 $1.44
2003 $0.22
2002 $1.47

Earnings Per Share - Modern Graham

2013 (estimate) $1.37
2012 $1.16
2011 $1.13
2010 $1.16
2009 $1.23
2008 $1.25


Pfizer is a strong company based solely on its balance sheet, but the earnings growth has not been strong enough for the Defensive Investor. Since 2008, the EPSmg (normalized earnings) has only grown from $1.25 to an estimated $1.37 for 2013. As a result of this lackluster growth, coupled with the fact the company is currently trading at a high PEmg ratio, the company is not suitable for Defensive Investors. However, the company does pass all of the requirements of the Enterprising Investor, which is able to take on additional risk by doing substantially more research than his Defensive Investor counterpart. From a valuation standpoint, the ModernGraham valuation model indicates that the company is overvalued at the present time. Once again this comes back to the lack of earnings growth; if the company doesn't grow its earnings, it will not be rewarded by the valuation model. The market is implying a growth rate of over 7% when EPSmg have grown at just over 2%. As a result, Pfizer may not be the best opportunity for investment at this time and any individual considering entering a position should do further research.

Disclaimer: The author did not hold a position in Pfizer at the time of publication and had no intention of purchasing a position in the next 72 hours.