By Matt Doiron
Billionaire Ken Fisher named Pfizer Inc. (PFE) his top stock pick for 2013 in December, and in fact, his Fisher Asset Management had the company as its largest position by market value at the end of the month, according to its 13F filing (find more of Fisher's top stock picks). According to the company's most recent 10-Q, Pfizer experienced a decline in revenues in the third quarter of 2012 versus a year earlier but, after eliminating restructuring charges, actually reported flat operating income. Earnings were lower, but this was only because the company recorded a gain on selling some of its operations in Q3 2011. As a result, while the headline financials show a decline in sales and in net income, we think the company is actually stable at this point.
The third quarter of 2012 seems to be a good guide to Pfizer's performance going forward, and the 43 cents per share that the company earned annualizes to a P/E multiple of 16. Wall Street analysts expect light earnings growth in 2013, with the earnings multiple based on consensus for this year being 12. 12 times earnings sounds like it could be right for a stable pharmaceutical company, though of course that figure is based on some improvement this year, and it's possible that The Street is being too optimistic. In the third quarter of the year, Cliff Asness's AQR Capital Management and Tiger Cub Rob Citrone's Discovery Capital Management both increased their stakes in Pfizer (see Asness's favorite stocks, and more stocks that Discovery was buying).
Pfizer, and other drug manufacturers, often gets some interest from income investors who like that these companies tend to have good cash flow and pay moderate to high dividend yields. In Pfizer's case, recent dividend payments have been 22 cents per quarter, which comes out to a 3.4% yield. However, the company is due for an increase in its payments, going by the pattern of the last few years; it has been four quarters since the last increase (from 20 cents per share) and Pfizer had increased the quarterly payment from 18 cents to 20 cents four quarters before that. If the company instead pays 24 cents per share each quarter in 2013, that would bring the forward yield to 3.6%. We would note, however, that Pfizer reduced its dividend payments during the recession.
Merck & Co. (MRK), Novartis AG (NVS), Sanofi SA (NYSE:SNY), and Bristol Myers Squibb Co. (BMY) are good peers for Pfizer. All four of these companies record dividend yields of over 3%, and are closer to 4% or higher in the case of Merck or Bristol-Myers Squibb. With the exception of Sanofi, these companies also tend towards lower betas than Pfizer, meaning their stock prices are less correlated to the broader market indices.
In terms of earnings multiples, Bristol-Myers Squibb seems quite expensive, at 19 times consensus earnings for 2013, particularly as recent revenue numbers have actually been down. Merck and Novartis are in similar situations to Pfizer; they each are valued at 19 times trailing earnings, with the sell-side expecting a stronger 2013 that brings the P/E down closer to 10. Neither business looks to have had a particularly good recent performance, and given their slight premium to Pfizer, we don't think that they make as good values. Sanofi reported a 23% decline in earnings in its most recent quarterly report compared to the same period in 2011, and with a trailing earnings multiple that matches Pfizer's at 16, we think that we would avoid it.
We can see a value case for Pfizer, particularly against its peers, but the company would have to deliver on its earnings targets for 2013. From an income-based perspective, however, it may actually be better to look at Merck as that stock offers a higher yield and weaker market exposure at only a small earnings premium.
Disclaimer: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.