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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 Regeneron Pharmaceuticals Inc. (NASDAQ:REGN) fares in the ModernGraham valuation model.

REGN Chart

REGN data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7

  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 - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  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 = 3/5

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

Valuation Summary

Key Data:

Recent Price$290.01
MG Value$88.11
MG OpinionOvervalued
Value Based on 3% Growth$33.19
Value Based on 0% Growth$19.45
Market Implied Growth Rate59.11%
Net Current Asset Value (NCAV)$8.00
PEmg126.72
Current Ratio6.01
PB Ratio14.81

Balance Sheet - 12/31/2013

Current Assets$1,796,900,000
Current Liabilities$298,800,000
Total Debt$504,600,000
Total Assets$2,951,000,000
Intangible Assets$0
Total Liabilities$998,900,000
Outstanding Shares99,690,000

Earnings Per Share

2013$3.81
2012$6.50
2011-$2.45
2010-$1.26
2009-$0.85
2008-$1.05
2007-$1.59
2006-$1.78
2005-$1.71
2004$0.74

Earnings Per Share - ModernGraham

2013$2.29
2012$1.08
2011-$1.57
2010-$1.19
2009-$1.23
2008-$1.31

Conclusion:

Regeneron Pharmaceuticals is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company has shown insufficient earnings stability or growth over the ten-year historical period, does not pay dividends, and is trading at a high PEmg ratio. For the Enterprising Investor, the company's lack of earnings stability and growth over the 5-year period is very concerning. As a result, value investors following the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities. From a valuation standpoint, the company appears significantly overvalued despite growing its EPSmg (normalized earnings) from -$1.23 in 2009 to $2.29 for 2013. This demonstrated level of growth still falls well below the market's implied estimate of 59.11% earnings growth(!) and leads the ModernGraham valuation model to return an estimate of intrinsic value that is considerably lower than the market price.

Disclaimer: The author did not hold a position in Regeneron Pharmaceuticals (REGN) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of Regeneron Pharmaceuticals