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Instructions
Selected Company for the questions that require it is Pfizer
1. Explain the significance of the Enterprise Valuation measure? Do you think it is useful? Why or why not?
2. Using the Enterprise Valuation model (Attached) determine the EV of
the company that you selected for the Company Analysis Project?
3. How does the EV of the company you selected for the Company Analysis
Project compare to the competitors that you included in the analysis?
4. What distributions has the company that you selected for the Company
Analysis Project made during most recent three years? How do those
distributions compare to competitors? Should the amounts be increased or
decreased and why?
Question 1
Business valuation is the process of determining the economic or fair value of a business. Analysts conduct business valuation for different reasons: determining the sale value and establishing partnership ownership or mergers and acquisitions. Valuation is also important for tax reporting. Revenue collection agents decide tax-related events such as the purchase or sale of gifts, sales of assets, or other taxation-related reasons. Different valuing methods include market capitalization, earnings multiplier, time revenue, liquidation value, book value, and discounted cash flow methods (Sonia & Raul 389). Financial statements that include the income statement, balance sheet, and cash flow statement are critical sources of the business valuation process. As a vital source of information, an analyst uses the current financial statements to forecast future cash flows, which are then discounted to determine an entity's present value.
The enterprise value is an indicator of how the market attributes and dynamics value the company as a whole. The financial metric is used by financial analysts to discuss the aggregate value of a firm as an enterprise rather than its market capitalization based on its trading in the securities exchange. The market capitalization determines the value of an entity based on its trading in the securities market and represents the total value of the firm based on the outstanding number of shares (Krishna et al., 2012). Overall, the enterprise value assists investors to determine the accurate value of the firm and check whether it is undervalued or not. Many analysts use the EV when determining the true purchase price of an entity mainly on mergers and acquisitions.
Summary of Calculations: Pfizer Versus GSK & Merck Co
| | Enterprise Value/EBITDA | | | | |
| | | | | | |
| | | | | | |
FIRM NAME(S) | | | | PFIZER | GSK | MERCK |
| | | | | | |
COMMON STOCK OUTSTANDING | |
| 5,500.00 | 4,976.00 | 2,530.00 |
RECENT SHARE PRICE | | 36.15 | 36.02 | 76.60 |
TOTAL DEBT | | | | 37,133.00 | 30,812.20 | 25,360.00 |
TOTAL CASH AND LIQUID INVESTMENTS | | | | 12,239.00 | 9,347.00 | 8,063.00 |
EBITDA VALUE (TTM) | | |
| 10,948.00 | 10,491.60 | 14,922.00 |
NET INCOME | | | 9,616.00 | 7,861.90 | 7,067.00 |
| | | | | |
| | COMPUTER-GENERATED CALCULATIONS | | | | |
| | | | | | |
COMPANY | | | | PFIZER | GSK | MERCK |
MARKET CAPITALIZATION | | | | 198,825.00 | 179,235.52 | 193,798.00 |
ENTERPRISE VALUE | | | | 223,719.00 | 200,700.72 | 211,095.00 |
EV/EBITDA RATIO | | | | 20.43 | 19.13 | 14.15 |
P/E RATIO | | | | 20.68 | 22.80 | 27.42 |
The enterprise value is measured as follows: Market Capitalization + Market value of debt – Cash and cash equivalents
The enterprise value calculation estimates the purchase price of a company. If there are two companies in the same industry, the higher the enterprise value, the higher the estimated purchase price of an organization. Enterprise represents the total value of the form as it includes both debt and equity capital and purposely uses the current market valuations. Hence, EV has the ability to compare firms with different capital structures and can identify an overvalued or undervalued firm.
The calculations borrowed from the company’s financial statements and online sources on current share price indicate that Pfizer has an enterprise value of $223,791 million. The company is highly financed by equity compared to debt indicating a strong brand value that attracts equity investors. The firm’s market capitalization stands at $198,825 million, total long-term debt $37,133 million, and cash and cash equivalents amounting to $12,239 million. The firm’s EV/EBITDA ratio stands at 20.43 compared to the PE ratio of 20.68. The comparison indicates a fairly valued firm.
Question 3
Based on the model and calculations, Pfizer has an enterprise value of $223,719 million compared to its close competitors GSK and MERCK Co with EV’s OF $200,700 million, and $211,095 million respectively. It would therefore refer that Pfizer is more valuable compared to GSK and MERCK Co. Similar to Pfizer, GSK & MERCK Co are also highly funded by equity compared to debt. The calculations indicate that more valuable firms have a balanced capital structure which increases their marketability in cases of mergers and acquisitions. Despite its low shareholding structure of 2,530 million outstanding shares, MERCK Co Has its share price trading double of Pfizer and GSK raising its market capitalization value. Comparing the EV/EBITDA ratio and the PE ratio, GSK, and MERCK Co are both undervalued indicating. Undervalued firms are a good option to buy in the securities market as their performance will increase the return on investments for the shareholders.
Question 4
Pfizer has made great strides in the pharmaceutical industry building on its enterprise value. Most recently, the company has been of great interest due to its production of the Covid-19 vaccine. The increased business activities have increased volumes and net income attributable to its shareholders. The discovery of the Covid-19 vaccine has instilled investor confidence building on its market capitalization. Besides, expansion of business activities leads to additional debt in its capital structure. GSK and MERCK Co though operating on a small scale in the distribution of the Covid-19 vaccine has also potential for growth and performance but not at the level of Pfizer. Therefore, Pfizer’s business model will for the near future continue to increase its marketability globally capitalizing on its enterprise value.
References
Krishna, Palepu and Healy Paul. Business Analysis & Valuation Using Financial Statements. South Western Australia: Cengage, 2012.
Sonia, Bentes and Navas Raul. "The Fundamental Analysis." International Journal of Finance, vol.3., no.1, 2013, pp.389-393.
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