1. 4
Financial Modeling
Project One

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. 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. 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. 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. 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. 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. 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. EXECUTIVE SUMMARY
INDUSTRY ANALYSIS
Estimating cost of debt
FIRM ANALYSIS
VALUATION
4

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. 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. 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. 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. 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. 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. EXECUTIVE SUMMARY
INDUSTRY ANALYSIS
Estimating cost of equity based on CAPM
FIRM ANALYSIS
VALUATION
4

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. 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. 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. 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. 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. EXECUTIVE SUMMARY
INDUSTRY ANALYSIS
Free cash flow calculating
FIRM ANALYSIS
VALUATION
2013
2017
4

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. 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. 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