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Financial ModelingProject OneGAO YUANJIANG YUNAN LI XINQIU BOQIANXIA YUE
4
INDUSTRY ANALYSISBased on five forces analysis
FIRM ANALYSISBased on SWOT analysis
VALUATION
01BAYER
02JOHNSON
&JOHNSON
03PFZIER
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
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.
F6116 PROJECT ONE
PROJECT ONEBY GROUP 4
20002005
2010
2013
2015 INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
The chart shows the sale amount of pharmaceutical industry constantly increase from 2000 to 2015.
ABCBAYERBayer Company was founded by Bayer in Germany in 1863. Bayer obtained the Aspirin in 1899. Bayer Healthcare is the subsidiary group of Bayer.
JAHNSONJJ is always in leading position in the same industry.
PFZIERpfzier consists of three business areas.
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
S WO T
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.
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.
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
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.
BAYER
S WO T
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.
he continuous large-scale returns have strong impacts on overall reputation of Johnson & Johnson and serious adverse effects on the profits of the company.
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
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.
JOHNSON&JOHNSON
S WO T
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.
The expired patent in near future is not the only threat for the sales volume of Pfizer.
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
It is more and more difficult to keep the original increasing speed due to too large scale of the company.
PFZIER
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Estimating cost of debt
• Historical approach• Firstly, we calculate the total amount of the interest-bearing liability
of the company in each of the past 5 years
• Secondly, we divided interest expense of each year by the total amount of interest-bearing liability
• after taking a simple-average, obtained the historical cost of debt for the company
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Estimating cost of debt2012/12/31 2011/12/31 2010/12/31 2009/12/31 2008/12/31 2007/12/31
Cash and cash equivalents
1695 1770 2840 2725 2094 2531
Short-term borrowings
2570 3684 1889 1489 6256 1336
Long-term borrowings
6962 7995 9944 11460 10614 13081
Interest and other debt expense, net
743 898 870 1305 1243 1427
Net debt 8,580 10,807 9,863 11,529 16,019 13,313Net interest cost
7.66% 8.69% 8.13% 9.47% 8.48%
Total debt 10,275 12,577 12,703 14,254 18,113 15,844Cash paid:
Interest 743 898 870 1,305 1,243 1,427
Interest cost 6.50% 7.10% 6.45% 8.06% 7.32%average interest cost
7.09%
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Rating-adjusted cost of debtthe credit rating for Bayer is A under Fitch standard we collected the information of the rating-A corporation bonds in Germany marketsRun the regression between yield and year to maturityThe function of the curve is
y = 0.0044x3 - 0.0368x2 + 0.2796x + 0.2879we assume that the average duration of Bayer’s borrowings equal to 5 yearsThe rating-adjusted cost of Debt for Bayer is 1.32%
Estimating cost of debt
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00
-2-10123456
f(x) = 0.00440642822 x³ − 0.03683745607 x² + 0.27956109931 x + 0.28787953209R² = 0.426632842032499
YTMPolynomial (YTM)
Estimating cost of debt
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Estimating cost of equity based on dividend
• 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
date Dividends per Share growth rate t ln(D)2012/12/31 1.9 15.15% 2012 0.6418542011/12/31 1.65 10.00% 2011 0.5007752010/12/31 1.5 7.14% 2010 0.4054652009/12/31 1.4 0.00% 2009 0.3364722008/12/31 1.4 2008 0.336472
Geometric Arithmetic LSMgrowth rate of
dividend
6.2980% 8.0736% 7.7507%
Gordon cost of equity
9.1074%
10.9299%
10.5984%
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Estimating cost of equity based on CF
• We get the dividends in past five years from the financial statement
Date
Cash flow to equity
holdersgrowth t ln(CF)
Shares outstanding 826,947,800
20121,366,000,0
00 9.9839% 2012 21.035 Share price, end 2012 71.89
20111,242,000,0
00 7.0690% 2011 20.939 Equity value, 59,449,277,342
20101,160,000,0
00 19.2189% 2010 20.871End 2012 total equity payout 1,366,000,000
2009 973,000,000 -13.5879% 2009 20.695
20081,126,000,0
00 2008 20.841 Normal growth rate 3.9399%
Growth rates 3.93% 5.6710%Normal 6.305%Cost of equity 6.3282%
effective 6.508%
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Estimating cost of equity based on CAPM
• Beta• we use DAX return as our market return. Both of
data are estimated monthly from Jan 2008 to Dec 2012
• of Bayer is 0.2789
-0.25 -0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15 0.2
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
f(x) = 0.278851956228475 x + 0.00499608398758865R² = 0.0669627406687732
Beta
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
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PROJECT ONEBY GROUP 4
Estimating cost of equity based on CAPM• Market risk premiumMethod 1• We use the DAX average return monthly from Jan 2008
to Dec 2012• The is 4.1241%.Method 2• We estimated the market risk premium by directly
computing the average difference between DAX and the 10-year Germany Treasury Bond Yield from Jan 2008 to Dec 2012.
• The is
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
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PROJECT ONEBY GROUP 4
• Method 3• PE ratio, equity cash flow payout ratio and the equity cash
flow growth rate are given by Bloomberg.
Estimating cost of equity based on CAPM
Market price/earnings multiple 19.609Equity cash flow payout ratio 0.38Anticipated growth of market equity cash flow 7.7910%Expected market return, E(Rm) 9.8799%
cost of equityClassic CAPM 2.86%
Tax-adjusted CAPM 2.58%
• We use the average market return of the three methods and get the cost of equity based on CAPM.
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
Calculating WACC
• For Bayer, we calculate the following data based on the financial statement
Average Tax 25.570%D/(D+E) 12.612%E/(D+E) 87.388%
• So we can calculate the WACC by different methods:
historical rating adjust
cost of equitydividend 9.5895% 9.0475%
cash flow 6.1956% 5.6536%
CAPM 2.9176% 2.3756%
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
• 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
Calculating WACC
Method weight WACCWACC based on Gordon per-share dividends and rating adjust yield
40% 9.05%
WACC based on Gordon equity payouts and rating adjust yield
40% 5.65%
WACC based on tax-adjusted CAPM and rating adjust yield
20% 2.38%
Weighted WACC 6.36%
• The final WACC is 6.36%
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
DCF ValuationRelative Valuation
Two Valuation Approaches
DCF Valuation
Financial statement forecasting
FCF calculating
Growth rate estimating
PROJECT ONEBY GROUP 4
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
Financial statement forecasting
• Use past 5 years financial statements• Calculate the average proportion of
each accounting items to sales• Estimate sales growth rate
2013 2014
20172016
2015
PROJECT ONEBY GROUP 4
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
Free cash flow calculating
PROJECT ONEBY GROUP 42013 2017
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
Growth rate estimating & Pricing
PROJECT ONEBY GROUP 4
• Global economy growth rate• Population growth rate in developed
countries.• Comparative advantage of company
Relative valuationINDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
PROJECT ONEBY GROUP 4
• Price to sales ratio (P/S ratio)• EBITDA margin• 306 listed companies in
pharmaceutical & biology industry
-1.00 -0.50 0.00 0.50 1.00 -1
19
39
59
79
99
No significant correlationship
INDUSTRY ANALYSIS
FIRM ANALYSIS
VALUATION
EXECUTIVE SUMMARY
Sensitivity analysis & Recommendation
PROJECT ONEBY GROUP 4
• The result is relatively insensitive to the change of WACC and growth rate
• Bayer and Johnson are undervalued• Pfizer is underpriced, too
Market price Estimated Recommendation
$541$71.89 Long
$157.4$85.3 Long
$38.9$25.08 Long