Pfizer: A Case Study of the Market's Extremely Low Valuations

I want to show you the dramatic collapse in stock valuations by taking a close look at Pfizer (PFE), the drug company. I’m not recommending the shares to own, I simply want to show you how extreme the market’s judgments have become.

On Monday, shares of Pfizer closed at $17.29. Looking deeper, we see that the company has a very large cash horde of $26 billion, while a fairly modest long-term debt position of $7 billion. In this environment, it certainly pays to be cash-rich. Pfizer’s cash position works out to about $3.86 a share. That means you can pick up the company’s operations—the nuts and bolts of the business—for just $13.43 a share.

Now, here’s a look at Pfizer’s stock along with its earnings-per-share. The black line is the stock and it follows the left scale. The gold line is the EPS and it follows the right scale.

The graph is scaled at a ratio of 10-to-1, so when the lines cross, the P/E ratio is exactly 10. Not a pretty sight, but the earnings are moving in the right direction. As you can see, Pfizer’s P/E ratio has plunged far below 10, and that’s including the company’s generous cash balance.

We can see that Pfizer’s earnings are climbing although the growth rate isn’t terribly strong. For 2009, Wall Street sees earnings coming in at $2.49 a share. Just by eyeballing the recent trend, that seems reasonable. So working with the $13.43 figure we can see that Pfizer is really going for about five times next year’s earnings, or an earnings yield of about 18.5%, which is several times what you can find in the bond market.

Now let me point out a few caveats. Price / earnings ratio is hardly a perfect measure of value. Also, Pfizer is a company that faces many challenges so many of these numbers are simply guesses about the future. The important point is that the recession has left us with stocks that have much cheaper real valuations than a few months ago, even companies that aren't so dependent on the credit markets. After all, Pfizer is still a cash-flow-positive company and that isn’t about to change anytime soon.

Pfizer currently pays a 32-cent quarterly dividend. The company made some news recently by declining to raise its dividend for the first time in four decades. Going by Monday’s close, that’s a dividend yield of 7.4%.

If a five-year Treasury currently gets you just 1.5%, then the market is terrified of stocks like Pfizer.

Disclosure: None

Comments

[BlueOkie:]

Can you say Lipitor? Viagra may get a big gov't contract for its give away program to informants.

2008 Dec 31 09:09 AM

[S. B.:]

The market values things based on its best guess of future earnings. The market doesn't care about past earnings, which is basically all this article talked about. When generic Lipitor becomes available in a couple of years, the earnings are going to take a big hit. The current price may or may not be fairly discounting that earnings decrease.

Equity valuation is not as simple as merely noting the P/E is low relative to the last couple of years of earnings. A computer with no context can tell you that.

2008 Dec 31 09:54 AM

[v.:]

Lipitor's revenue for 2006 (couldn't find anything more recent just now) were $12.9 billion. Total revenue was over $48 billion.
Even if totally exclude Lipitor sales (which is obviously much to pessimistic, people will still buy it, it will only cost less), that would have been over $35 billion of revenue or 3/4th of 48 billion.
If we extrapolate this to net income we would still see an EPS of about $1.8 or a P/E of around 10.
Not bad for a company with a huge pile of cash, low debt and a 7+% dividend

2008 Dec 31 12:29 PM

[Dr.Jackpot:]

All I know is the chart shows a declining stock price for the last nine years. My broker was pushing it years ago at 29. I would like to believe, but can we???

2008 Dec 31 01:04 PM

[Ogradius:]

The graph alone gets the author's point across.

2008 Dec 31 04:42 PM

[Dan Jacome:]

Generics typically chop off 80% off a branded drugs revenue base - market is smarter than all of us and pricing in Armageddon for Pfizer and that explains the ugly chart above. A low P/E means nothing in this market - PFE will only be bought by value long PMs if there is a tangible catalyst in the future for Pfizer - and sadly, there isn't one last time I checked. Add to this the threat from Obama that he wants the US govt to negotiate drug prices with Big Pharma on behalf of Medicare and viola - you land at PFEs battered share price. Likely washed out down here, but this is slow moving money for a while

Jan 01 08:57 PM