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. 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 Pfizer Inc. (NYSE:PFE) fares in the ModernGraham valuation model.
PFE data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- 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 - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- 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 = 5/5
- 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 - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$19.08|
|Value Based on 0% Growth||$11.19|
|Market Implied Growth Rate||8.07%|
|Net Current Asset Value (NCAV)||-$6.18|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
PFE Dividend data by YCharts
Pfizer Inc. is suitable for the Enterprising Investor but not the Defensive Investor. The company has not sufficiently grown its earnings over the last ten years for the Defensive Investor, and it currently trades at high PEmg and PB ratios. However, it passes all of the requirements for the Enterprising Investor, so that investor type should keep the company on a watch list going forward. In addition, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into both the company and other opportunities, including a review of ModernGraham's valuation of Merck & Co. (NYSE:MRK) as well as 5 Outstanding Dow Components.
From a valuation perspective, the company appears to be overvalued after only growing its EPSmg (normalized earnings) from $1.23 in 2009 to $1.32 for 2013. This very low level of historically demonstrated growth does not support the market's implied estimate for earnings growth of 8.07%, leading the ModernGraham valuation model to return an estimate for intrinsic value that falls well below the market price at this time.
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 Pfizer Inc.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Pfizer Inc. (PFE) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.