Pfizer (NYSE: PFE) is the top holding of The Fairhome Fund and accounted for 19% of fund assets as of November 30th. Fairholme chief and noted value investor Bruce Berkowitz arranged the Pfizer call on March 30th. Listen to the conference call.
We have tremendous respect for Berkowitz, and his investment in Pfizer looks shrewd. Pfizer is a strong company with many good pharmaceutical businesses that earn high returns on capital. With consensus EPS estimates of $2.05 for 2009 and $2.31 for 2010, the stock looks dirt cheap at roughly $14 per share. Key events affecting value are the pending acquisition of Wyeth (WYE) and the Lipitor patent expiration in 2011. Fairholme's Berkowitz likes the "quality balance sheet of a company producing vital products."
While Pfizer appears highly likely to outperform the broader market in coming years based primarily on the company's low multiple of prospective earnings, we were not very impressed by CEO Jeff Kindler and CFO Frank D'Amelio's performance on the March 30th call. They struck us as a highly polished duo steeped in business-school speak. We did not find the executives' comments specific enough to gain comfort that management truly seeks to maximize returns on capital. The Wyeth deal, for example, can easily be seen as "empire building" rather than "value building." Nothing the executives said convinced us that the Wyeth deal will grow per-share shareholder value.
- Wyeth is a "perfect fit" for advancing strategies articulated by Pfizer a year ago
- "New Pfizer" will be "very competitively positioned" in fast-changing healthcare environment
- Deal "strengthens platform" for "stable and consistent earnings growth"
- "Long before we contemplated doing the Wyeth deal... we said to ourselves [in late 2007 and early 2008], we've got this Lipitor expiration at the end of 2011 -- what kind of company do we need to be to be successful after that event...? We concluded... that in many fundamental ways we had to change and evolve our business model to become much more relevant to a broader array of patients... with the right mix of health care product offerings."
- "Relentlessly focused on delivering value to shareholders"
- $4 billion in synergies from Wyeth (half from SG&A, half from R&D and manufacturing)
- Targeting operating cash flow in 2012 of $20+ billion.
- "Not immune to global economic downturn" (higher co-pays have an impact)
- "Seen some slowing in the emerging markets"
- How big a threat is government action to force price reductions?
- In Europe, "price pressures have been a part of the operating environment for a long time."
- The U.S. is "a very different situation..." There is a "significant effort underway in Washington to adopt health care reform..." "...see some actually encouraging signs in that regard..." It's "very encouraging" that President's budget did not include repeal of the Medicare non-interference clause. "...do not see any sign that there's going to be a really serious effort to control or restrain our prices in a way that would be damaging to innovation or to our business model."
- "Pharmaceutical spending growth is very low right now. It's at the lowest it's been in 50 years due to patent expirations and slow growth of new products."
- Insurance companies giving preferential treatment to generic drugs is "ongoing challenge."
- Dividend was cut in half to $0.64 per share per year.
Disclosure: No position.