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Investors in Pfizer (NYSE:PFE) were unpleasantly surprised after analysts at Goldman Sachs downgraded the stock. While the bank remains upbeat about Pfizer's prospects following the continued expectations of restructuring efforts, it sees slower progress in this transformation.

While the pace of these efforts might be slowing down, the long term appeal remains as acknowledged by the bank. I agree with Goldman and continue to see appeal going forwards, with returns being tied to the pace of divestitures or sales of businesses, and of course proceeds being generated from these actions.

Goldman Turns Cautious

Analysts at Goldman Sachs (NYSE:GS) downgraded Pfizer from "Conviction Buy" to "Buy", while actually raising the price target by a dollar to $35 per share.

The one-year price target implies 9% upside for Pfizer's shares. Analyst Jami Rubin has long been an advocate of a break-up or spin-off story. The analyst has been arguing for a restructuring as early as November of 2008.

Despite the modest pace of developments ever since, a full break up of Pfizer by 2017 is still expected according to Goldman. Such an event should in that case be announced in 2015 or 2016.

Note that developments have been occurring at a limited pace, although Pfizer has spun-off its animal health business Zoetis (NYSE:ZTS) in February of this year.

Valuation

Pfizer ended its third quarter with $33.7 billion in cash, equivalents and short term investments. Total debt stands at $36.5 billion, resulting in a modest net debt position of $2.8 billion.

Revenues for the first nine months of the year came in at $38.0 billion, down 7% on the year before. Adjusted earnings were down by some 6% to $11.6 billion. Note that GAAP earnings were much higher on the back of one-time items.

Pfizer guides for full year revenues of $51.3 billion, plus or minus $500 million. Adjusted earnings are seen between $2.15 and $2.20 per share, around $14.5 billion.

Trading around $31 per share, the market values Pfizer at $203 billion. This values the company's equity at 4.0 times annual revenues and 14 times annual earnings.

Pfizer pays a quarterly dividend of $0.24 per share, for an annual dividend yield of 3.1%.

Some Historical Perspective

Long term investors have long relied on dividends for their returns. Shares traded around highs of $45 at the turn of the millennium and have steadily fallen to lows of $12 in 2009. Ever since shares have seen a steady recovery to current levels around $31 per share, after witnessing year to date returns of 25%.

Between 2009 and 2012, Pfizer has increased its annual revenues by some 20% to $59.0 billion. Underlying earnings rose by little over 10% in the meantime to $9.5 billion.

Note that revenues are set to decline meaningfully this year on the back of the spin-off of Zoetis and the sale of the baby food business.

Investment Thesis

Pfizer has grown its operations in recent years, mostly on the back of the $68 billion acquisition of Wyeth back in 2009.

Investors are reasonably happy with the prospects this year. The divestiture of Zoetis, cost control and growth at Pfizer's oncology drugs Xalkori and Inlyta have been supportive for shares this year.

On top of these developments, Pfizer announced plans to separate its operations into the Global Innovative Pharmaceutical business, the Global Vaccines, Oncology and Consumer Healthcare business, as well as the Global Established Pharmaceutical business. The rationale behind the decision is to provide greater transparency of the profitability of each unit, raising the speculation about possible divestitures or sales of entire businesses. Earlier this year Pfizer has already spun-off Zoetis, while last year it sold the baby food unit to Nestle for $11.8 billion.

Back in October, I last took a look at the company's prospects following the release of its third quarter results. I noted that prospects about divestitures or sales could provide a boost going forwards. On top of that, Pfizer has a promising pipeline and seen a strong introduction of its oncology drugs. Shareholder have furthermore seen solid cash flows through a $15 billion share repurchase program this year, combined with solid dividends.

I applaud Pfizer's transformation efforts, yet the largest steps still have to be taken and Goldman is not pleased with the pace of the transformation. I agree that a more focused strategy, following sales or divestitures of businesses could create more focus, efficiency, and thereby value for investors. I remain cautiously optimistic on the back of a solid balance sheet, promising operational developments and the prospects for further restructuring.

That being said, share returns are partially tied to the pace of the transformation process.

Source: Pfizer: Transformation Pace And Oncology Success Determine Potential Returns