ModernGraham Quarterly Valuation Of Celgene Corporation
Summary
- CELG is suitable for the Enterprising Investor following the ModernGraham approach.
- According to the ModernGraham valuation model, the company is overvalued at the present time.
- The market is implying a 19.69% earnings growth over the next 7-10 years, which is well above the company's actual growth in recent years.
Celgene Corporation (NASDAQ:CELG) has seen a huge increase in stock price over the last couple of years. This market behavior may make some to believe the company is strong. However, technical analysis of Mr. Market's treatment of a company should not be utilized to determine whether it is a good investment. Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment's merits. Here is a look at how Celgene Corporation fares in the ModernGraham valuation model.
The model is inspired by the teachings of Benjamin Graham, and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.
In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved 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.
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- 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 - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- 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 - PASS
- Moderate PEmg (price over normalized earnings) 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 = 4/5
- 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 - FAIL
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary
Key Data:
| Recent Price | $107.93 |
| MG Value | $86.78 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $32.68 |
| Value Based on 0% Growth | $19.16 |
| Market Implied Growth Rate | 19.69% |
| Net Current Asset Value (NCAV) | -$2.16 |
| PEmg | 47.88 |
| Current Ratio | 6.32 |
| PB Ratio | 15.58 |
Balance Sheet - September 2014
| Current Assets | $8,836,000,000 |
| Current Liabilities | $1,398,000,000 |
| Total Debt | $6,737,000,000 |
| Total Assets | $16,403,000,000 |
| Intangible Assets | $6,323,000,000 |
| Total Liabilities | $10,635,000,000 |
| Outstanding Shares | 832,800,000 |
Earnings Per Share
| 2014 (estimate) | $3.66 |
| 2013 | $1.69 |
| 2012 | $1.65 |
| 2011 | $1.43 |
| 2010 | $0.94 |
| 2009 | $0.83 |
| 2008 | -$1.73 |
| 2007 | $0.27 |
| 2006 | $0.09 |
| 2005 | $0.09 |
| 2004 | $0.08 |
Earnings Per Share - ModernGraham
| 2014 (estimate) | $2.25 |
| 2013 | $1.47 |
| 2012 | $1.11 |
| 2011 | $0.68 |
| 2010 | $0.23 |
| 2009 | -$0.11 |
Dividend History
Celgene does not pay a dividend.
Conclusion:
Celgene Corporation is suitable for the Enterprising Investor, but not the Defensive Investor, who is concerned with the lack of earnings stability over the last ten years, the lack of dividend payments, and the high PEmg and PB ratios. The Enterprising Investor's only issue with the company is the lack of dividend payments. As a result, the Enterprising Investor should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company's intrinsic value.
From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $0.23 in 2010 to an estimated $2.25 for 2014. While this demonstrated growth is very strong, it does not support the market's implied estimate of 19.69%. Such a high growth rate is most likely unsustainable, and conservative investors will be very hesitant to proceed with using any rate that high. As a result, the ModernGraham valuation model returns an estimate of intrinsic value below the market price at this time, and the company appears to be overvalued by the market.
Be sure to check out previous ModernGraham valuations of Celgene Corporation for better perspective.
This article was written by
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.