Valuing Drug Stocks, Part I

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 |  Includes: ABT, JNJ, MRK, PFE
by: CRG Research

In this series, we are going to value the common equity shares of Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Abbott Labs (NYSE:ABT). In this article, we'll analyze the financial performances and positions of these firms between 2008 and 2011. Further, we'll examine the effectiveness of management and the financial leverage of the four firms. Doing in-depth research and analysis of these firms takes several articles and this is part one. In part two we'll cover more recent financial performances and positions of these firms. Parts three and four will cover valuations. Parts five through seven will cover the economic dynamics impacting these firms, the portfolio management aspects, and the conclusions and recommendations.

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Revenue
  JNJ MRK PFE ABT
2008 63747 23850 48296 29527.6
2009 61897 27428 49269 30764.7
2010 61587 45987 67057 35166.7
2011 65030 48047 67425 38851.3
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After a slight decline in 2009 and 2010, Johnson & Johnson's revenue increased in 2011 to $65 billion. Merck, Pfizer and Abbott did an excellent job of increasing revenue betwen 2008 and 2011. Pfizer surpassed Johnson & Johnson as the largest by revenue in 2010. Merck's revenue is the most risky and Johnson & Johnson's is the least risky.

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Net Income
  JNJ MRK PFE ABT
2008 12949 7808 8104 4880.7
2009 12266 12899 8635 5745.8
2010 13334 861 8257 4626.2
2011 9672 6272 10009 4728.5
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Johnson & Johnson's net income declined substantially in 2011 to $9.7 billion. Merck's net income has a high standard deviation and was below the 2009 peak in 2011. Pfizer's net income is increasing and surpassed the $10 billion mark in 2011. Abbott's net income has been flat over the past four years.

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Cash Flow From Operations
  JNJ MRK PFE ABT
2008 14972 6571.7 18238 7344.2
2009 16571 3392 16587 7275.2
2010 16385 10822 11454 8736
2011 14298 12383 20240 8970.1
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The cash flow performance for the firms excluding Johnson & Johnson was excellent. I'm impressed with Abbott's ability to generate cash flow from operations.

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Total Equity
  JNJ MRK PFE ABT
2008 42511 18758.3 57556 17479.6
2009 50588 59058 90014 23144.3
2010 56579 54376 87813 22676.8
2011 57080 54517 82190 24439.8
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Between 2008 and 2011, all four firms increased total equity. Merck's and Pfizer's total equity declined in recent years. That said, Abbott and Johnson & Johnson consistently increased the book value of equity.

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Total Assets
  JNJ MRK PFE ABT
2008 84912 47195.7 111148 42419.2
2009 94682 112314 212949 52581.6
2010 102908 105781 195014 60573.9
2011 113644 105128 188002 60276.9
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All four firms assets increased compared to 2008. Johnson & Johnson's assets increased every year. Abbott's assets increased every year except 2011. Merck's and Pfizer's assets declined the past few years.

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Cash
  JNJ MRK PFE ABT
2008 12809 5486.4 24555 5079.6
2009 19425 9604 27164 9932
2010 27658 12201 28479 5451.5
2011 32261 14972 26809 8097.4
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The cash balances have increased. Johnson & Johnson and Pfizer have the most cash. Abbott Labs has the least amount of cash.

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Johnson & Johnson's share of revenue declined substantially while Merck's increased substantially. Pfizer's share of revenue increased and Abbott's is flat.

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Pfizer and Johnson & Johnson were the most profitable firms in 2011. Abbott was the least profitable. The profitability declined for all four firms.

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Pfizer and Abbott have the highest financial leverage. That means that if EBIT increases, earnings will increase by a greater amount for Pfizer and Abbott.

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In terms of return on equity, Johnson & Johnson and Abbott are leading the group. Overall, return on equity is declining.

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Return on assets is declining. Johnson & Johnson and Abbott are leading the group in this category.

To be continued...

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.