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In this series, we are valuing the common equity shares of Johnson & Johnson (NYSE:JNJ), Merck & Co Inc. (NYSE:MRK), Pfizer Inc. (NYSE:PFE), and Abbott Laboratories (NYSE:ABT). In this article, we are going to examine a forward price-sales sensitivity analysis model of the firms.

Johnson & Johnson

Johnson & Johnson's revenue is forecast to continue to increase in the second half of 2012. The full-year revenue-share forecast is $24.27. The twelve trailing months revenue-share is $23.61.

Forward Price-Sales: Sensitivity Analysis
$24.2024.0023.8023.6023.4023.20
622.562.582.612.632.652.67
642.642.672.692.712.742.76
662.732.752.772.802.822.84
682.812.832.862.882.912.93
702.892.922.942.972.993.02
722.983.003.033.053.083.10

Under the worst-case scenario, the price-sales ratio declines 12 percent from the current value. In that scenario, revenue-share increases to $24.20 and the share price declines to $62. More practically, I expect the price-sales ratio to be between 2.56 and 3.08 during the next six months.

In other words, the low end of the range would be 12 percent below the current valuation, and the high end 6 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values near 2.56 and sellers near 3.08.

Merck

Merck's revenue is forecast to continue to increase in the second half of 2012. The full-year revenue-share forecast is $16.49. The twelve trailing months revenue-share is $15.90.

Forward Price-Sales: Sensitivity Analysis
$16.5016.3016.1015.9015.7015.50
40

2.42

2.452.482.522.552.58
422.552.582.612.642.682.71
442.672.702.732.772.802.84
462.792.822.862.892.932.97
482.912.942.983.023.063.10
503.033.073.113.143.183.23

Under the worst-case scenario, the price-sales ratio declines 12.9 percent from the current value. In that scenario, revenue-share increases to $16.50 and the share price declines to $40. More practically, I expect the price-sales ratio to be between 2.42 and 3.23 during the next six months.

In other words, the low end of the range would be 12.9 percent below the current valuation, and the high end 16.2 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values near 2.42 and sellers near 3.23.

Pfizer

Pfizer's revenue is forecast to continue to decline in the second half of 2012. The full-year revenue-share forecast is $8.37. The twelve trailing months revenue-share is $8.54.

Forward Price-Sales: Sensitivity Analysis
$8.88.68.48.2
202.272.332.382.44
212.392.442.502.56
222.502.562.622.68
232.612.672.742.80
242.732.792.862.93
252.842.912.983.05
262.953.023.103.17

Under the worst-case scenario, the price-sales ratio declines 19.5 percent from the current value. In that scenario, revenue-share increases to $8.80 and the share price declines to $20. More practically, I expect the price-sales ratio to be between 2.27 and 3.17 during the next six months.

In other words, the low end of the range would be 19.5 percent below the current valuation, and the high end 12.4 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values near 2.27 and sellers near 3.17.

Abbott Laboratories

Abbott's revenue is forecast to be flat in the second half of 2012. The full-year revenue-share forecast is $25.14. The twelve trailing months revenue-share is $25.10.

Forward Price-Sales: Sensitivity Analysis
$25.3025.1024.9024.70
552.172.192.212.23
602.372.392.412.43
652.572.592.612.63
702.772.792.812.83
752.962.993.013.04

Under the worst-case scenario, the price-sales ratio declines 21 percent from the current value. In that scenario, revenue-share increases to $25.30 and the share price declines to $55. More practically, I expect the price-sales ratio to be between 2.17 and 3.01 during the next six months.

In other words, the low end of the range would be 21 percent below the current valuation, and the high end 9 percent above. Based on this analysis alone, investors would want to be buyers at price-sales values near 2.17 and sellers near 3.01.

Johnson & Johnson and Merck's revenue is forecast to increase this year. Pfizer's revenue is forecast to decline and Abbott's revenue is forecast to be flat.

In terms of worst-case scenario, Johnson & Johnson and Merck have the smallest forecasted drawdowns. That said, Merck has the best forecasted reward-risk ratio among the firms.

Based on this analysis alone, investing in Merck would be the best decision.

To be continued...

Source: Valuing Drug Stocks