Biogen does not have the profile of a defensive investment based on the requirements of Ben Graham. The Biotechnology firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.
Biogen Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 6 year average earnings per share (20.09) * 6 year average book value per share (99.91) = $202.53
After an impressive 31.0% performance over the 12 months, Biogen is now trading well over its price because its Graham number is 29.4% above today's share price of $262.13. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Positive Retained Earnings From 2008 To 2022, No Dividend Record, and Eps Growth In Excess Of Graham'S Requirements
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Biogen had positive retained earnings from 2008 to 2022 with an average of $9.77 Billion over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Biogen's EPS growth over time, we will average out its EPS for 2007, 2008, and 2009, which were $1.99, $2.65, and $1.06 respectively. This gives us an average of $1.90 for the period of 2007 to 2009. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $24.80, $10.40, and $20.87, for an average of $18.69. Now we see that Biogen's EPS growth was 883.68% during this period, which satisfies Ben Graham's requirement.
We have no record of Biogen offering a regular dividend.
Biogen’s Balance Sheet Meets Graham’s Criteria
It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet Biogen passes comfortably, with an average current ratio of 3.0, and average debt to net current asset ratio of -4.6.
Conclusion
According to Graham's analysis, Biogen is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.
| 2018-02-01 | 2019-02-06 | 2020-02-06 | 2021-02-03 | 2022-02-03 | 2023-02-15 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $12,274 | $13,453 | $14,378 | $13,445 | $10,982 | $10,173 |
| Gross Margins | 87.0% | 86.0% | 86.0% | 87.0% | 81.0% | 78.0% |
| Operating Margins | 45% | 46% | 54% | 38% | 34% | 32% |
| Net Margins | 21.0% | 33.0% | 41.0% | 30.0% | 14.0% | 30.0% |
| Net Income (MM) | $2,539 | $4,431 | $5,888 | $4,001 | $1,556 | $3,047 |
| Earnings Per Share | $11.92 | $21.58 | $31.42 | $24.8 | $10.47 | $20.37 |
| EPS Growth | n/a | 81.04% | 45.6% | -21.07% | -57.78% | 94.56% |
| Diluted Shares (MM) | 213 | 205 | 187 | 161 | 149 | 150 |
| Free Cash Flow (MM) | $6,394 | $6,961 | $7,748 | $4,707 | $3,917 | $1,045 |
| Capital Expenditures (MM) | -$1,843 | -$774 | -$670 | -$477 | -$277 | $339 |
| Net Current Assets (MM) | -$3,181 | -$4,616 | -$5,513 | -$7,046 | -$5,061 | -$1,374 |
| Long Term Debt (MM) | $5,935 | $5,936 | $4,459 | $7,426 | $6,274 | $6,281 |
