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  1. 1. 4 Financial Modeling Project One
  2. 2. 01 EXECUTIVE SUMMARY BAYER INDUSTRY ANALYSIS Based on five forces analysis FIRM ANALYSIS Based on SWOT analysis VALUATION 02 JOHNSON &JOHNSON 03 PFZIER 4
  3. 3. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION F6116 PROJECT ONE In the project, we study three leading companies in global pharmaceutical industry, namely Bayer, Johnson & Johnson, and Pfizer. We manage to apply approaches of cost of equity, WACC and firm valuation in Excel, and also give our analysis and recommendations for three companies. At the end, we give recommendations of each stock based on analysis and valuation above. 4
  4. 4. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS The chart shows the sale amount of pharmaceutical industry constantly increase from 2000 to 2015. VALUATION 2015 2013 2010 2000 2005 4
  5. 5. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION A BAYER Bayer Company was founded by Bayer in Germany in 1863. Bayer obtained the Aspirin in 1899. Bayer Healthcare is the subsidiary group of Bayer. JAHNSON JJ is always in leading position in the same industry. C PFZIER pfzier consists of three business areas. 4
  6. 6. EXECUTIVE SUMMARY BAYER INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION Bayer Group has involved in pharmaceutical, chemical industry and medical equipment and other fields. Strong brand and technical advantages approved by patients and doctors are provided by Bayer. The overall growth of Asian economies and the gradually aging of Chinese economies have created new markets for Bayer Healthcare. The market promotion in world-wide is not enough and promotion method is too simple. It fails to adapt to the medical model in Asia, Africa and Latin America. T Asian-Pacific area, due to the legal system of China and India, the scaled imitation medicines of Bayer's original patent has greatly reduced the profits of Bayer. 4
  7. 7. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION JOHNSON&JOHNSON The development cost for approval of new medicines is too high and the increasing speed of new products is gradually decreased Since Johnson & Johnson involves in daily medical service from baby to the aged, this creates the sales opportunities for Johnson & Johnson from birth to death. Since Johnson & Johnson involves in daily medical service from baby to the aged, this creates the sales opportunities for Johnson & Johnson from birth to death. T he continuous large-scale returns have strong impacts on overall reputation of Johnson & Johnson and serious adverse effects on the profits of the company. 4
  8. 8. EXECUTIVE SUMMARY PFZIER INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION The acquisition of Wyeth-Ayerst has strengthened the outstanding capacity of Pfizer in marketing and has extended its markets as well as reduced the generality cost. The sales of Pfizer have been in weakened status recently. Nevertheless, many medicines in marketing channel are still full of potential. It is more and more difficult to keep the original increasing speed due to too large scale of the company. T The expired patent in near future is not the only threat for the sales volume of Pfizer. 4
  9. 9. EXECUTIVE SUMMARY INDUSTRY ANALYSIS Estimating cost of debt FIRM ANALYSIS VALUATION 4
  10. 10. EXECUTIVE SUMMARY INDUSTRY ANALYSIS Estimating cost of debt 2012/12/31 2011/12/31 2010/12/31 2009/12/31 2008/12/31 2007/12/31 FIRM ANALYSIS Cash and cash equivalents 1695 1770 2840 2725 2094 2531 VALUATION Short-term borrowings Long-term borrowings Interest and other debt expense, net Net debt 2570 3684 1889 1489 6256 1336 6962 7995 9944 11460 10614 13081 743 898 870 1305 1243 1427 8,580 7.66% 10,807 8.69% 9,863 8.13% 11,529 9.47% 16,019 8.48% 13,313 10,275 12,577 12,703 14,254 18,113 15,844 Interest 743 898 870 1,305 1,243 1,427 Interest cost 6.50% 7.09% 7.10% 6.45% 8.06% 7.32% Net interest cost Total debt Cash paid: average interest cost 4
  11. 11. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION Estimating cost of debt Rating-adjusted cost of debt the credit rating for Bayer is A under Fitch standard we collected the information of the rating-A corporation bonds in Germany markets Run the regression between yield and year to maturity The function of the curve is y = 0.0044x3 - 0.0368x2 + 0.2796x + 0.2879 we assume that the average duration of Bayer’s borrowings equal to 5 years The rating-adjusted cost of Debt for Bayer is 1.32% 4
  12. 12. EXECUTIVE SUMMARY INDUSTRY ANALYSIS Estimating cost of debt FIRM ANALYSIS VALUATION 6 5 4 3 2 1 0 -1 0.00 -2 y = 0.0044x3 - 0.0368x2 + 0.2796x + 0.2879 R² = 0.4266 YTM Poly. (YTM) 2.00 4.00 6.00 8.00 4
  13. 13. EXECUTIVE SUMMARY Estimating cost of equity based on dividend INDUSTRY ANALYSIS FIRM ANALYSIS • VALUATION date 2012/12/31 2011/12/31 2010/12/31 2009/12/31 2008/12/31 We get the dividends per share in past five years from the financial statement, and calculate the cost of equity by arithmetic, geometric and LSM Dividends per Share growth rate 1.9 1.65 1.5 1.4 1.4 Geometric Arithmetic growth rate of 6.2980% 8.0736% dividend Gordon cost of equity 9.1074% 10.9299% t 15.15% 10.00% 7.14% 0.00% ln(D) 2012 2011 2010 2009 2008 0.641854 0.500775 0.405465 0.336472 0.336472 LSM 7.7507% 10.5984% 4
  14. 14. EXECUTIVE SUMMARY INDUSTRY ANALYSIS Estimating cost of equity based on CF FIRM ANALYSIS • VALUATION Cash flow to equity Date holders 1,366,000,0 2012 00 1,242,000,0 2011 00 1,160,000,0 2010 00 2009 973,000,000 1,126,000,0 2008 00 Growth rates 3.93% We get the dividends in past five years from the financial statement growth t ln(CF) Shares outstanding 826,947,800 9.9839% 2012 21.035 Share price, end 2012 7.0690% 2011 20.939 Equity value, 59,449,277,342 19.2189% 2010 End 2012 total equity 20.871 payout 1,366,000,000 -13.5879% 2009 20.695 2008 20.841 Normal growth rate 5.6710% Normal effective 6.305% Cost of equity 6.508% 71.89 3.9399% 6.3282% 4
  15. 15. EXECUTIVE SUMMARY Estimating cost of equity based on CAPM INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION Beta 0.3 0.2 0.1 y = 0.2789x + 0.005 R² = 0.067 0 -0.3 -0.2 -0.1 -0.1 -0.2 -0.3 0 0.1 0.2 4
  16. 16. EXECUTIVE SUMMARY INDUSTRY ANALYSIS Estimating cost of equity based on CAPM FIRM ANALYSIS VALUATION 4
  17. 17. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION Estimating cost of equity based on CAPM • • Method 3 PE ratio, equity cash flow payout ratio and the equity cash flow growth rate are given by Bloomberg. Market price/earnings multiple Equity cash flow payout ratio Anticipated growth of market equity cash flow Expected market return, E(Rm) 19.609 0.38 7.7910% 9.8799% • We use the average market return of the three methods and get the cost of equity based on CAPM. cost of equity Classic CAPM Tax-adjusted CAPM 2.86% 2.58% 4
  18. 18. EXECUTIVE SUMMARY Calculating WACC INDUSTRY ANALYSIS • For Bayer, we calculate the following data based on the financial statement FIRM ANALYSIS VALUATION Average Tax D/(D+E) E/(D+E) 25.570% 12.612% 87.388% • So we can calculate the WACC by different methods: historical dividend cost of equity cash flow CAPM rating adjust 9.5895% 9.0475% 6.1956% 5.6536% 2.9176% 2.3756% 4
  19. 19. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION Calculating WACC • • We drop the cost of debt based on interest cost is too high as 7.09%, it requires higher cost of equity We give the weight of the remaining three methods Method weight WACC WACC based on Gordon per40% 9.05% share dividends and rating adjust yield WACC based on Gordon equity 40% 5.65% payouts and rating adjust yield WACC based on tax-adjusted CAPM and rating adjust yield Weighted WACC • The final WACC is 6.36% 20% 2.38% 6.36% 4
  20. 20. EXECUTIVE SUMMARY Two Valuation Approaches INDUSTRY ANALYSIS DCF Valuation Relative Valuation FIRM ANALYSIS VALUATION Financial statement forecasting DCF Valuation FCF calculating Growth rate estimating 4
  21. 21. EXECUTIVE SUMMARY Financial statement forecasting INDUSTRY ANALYSIS • Use past 5 years financial statements • Calculate the average proportion of each accounting items to sales • Estimate sales growth rate FIRM ANALYSIS VALUATION 2013 2014 2015 2016 2017 4
  22. 22. EXECUTIVE SUMMARY INDUSTRY ANALYSIS Free cash flow calculating FIRM ANALYSIS VALUATION 2013 2017 4
  23. 23. EXECUTIVE SUMMARY INDUSTRY ANALYSIS FIRM ANALYSIS VALUATION Growth rate estimating & Pricing • Global economy growth rate • Population growth rate in developed countries. • Comparative advantage of company 4
  24. 24. EXECUTIVE SUMMARY Relative valuation INDUSTRY ANALYSIS • Price to sales ratio (P/S ratio) • EBITDA margin • 306 listed companies in pharmaceutical & biology industry FIRM ANALYSIS VALUATION 99 79 No significant correlationship 59 39 19 -1 -1.00 -0.50 0.00 0.50 1.00 4
  25. 25. EXECUTIVE SUMMARY Sensitivity analysis & Recommendation INDUSTRY ANALYSIS FIRM ANALYSIS • The result is relatively insensitive to the change of WACC and growth rate • Bayer and Johnson are undervalued • Pfizer is underpriced, too VALUATION Market price Estimated Recommendation $71.89 $541 Long $85.3 $157.4 Long $25.08 $38.9 Long 4

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