A Look At Pfizer And Other Value Ideas

Dec.13.06 | About: Pfizer Inc. (PFE)

Topic of the week is Pfizer's plunge. Since the stock is the darling of many value investors we will focus on it. At the end of the column we will also offer an interesting value play, an intriguing story of an analogy between investing and gambling and an entertaining and instructive Warren Buffett video.

First let's talk about Pfizer.

The company stopped clinical trials of torcetrapib. This anti cholesterol drug was supposed to replace Lipitor which represents 25% of the drug maker's sales. Suddenly, Pfizer's drug pipeline seems rather dry.

How did this failure come about? Only two statistically abnormal deaths, in a clinical trial involving 15.000 patients (i.e. 0.02% of the sample), triggered the threshold which, almost on automatic pilot, forced Pfizer to stop the trial.

The Economist explains why many in the drug industry may share Pfzer's problems.

Fortune wonders if after the torcetrapib failure it is a good idea to outsource research and development of early stage drugs.

Robert Stever at TheStreet.com sums up the long term revenue and earnings consequences of the torcetrapib failure.

The Wall Street Journal reminds us here that despite heavy losses suffered by investors and flat revenues expected by management for the next couple of years, Pfizer still has hefty resources available. The recent cut of 20% of its U.S. sales force will save the company $400 million a year. After receiving money from the sale of its consumer-products unit to Johnson & Johnson next month, Pfizer will have $34 billion (yes, billion with a "b") in cash. It may be enough to finance a successful turnaround.

At the end of a gloomy article, the Breaking News column points out that the company is expected to have a free cash flow of $10 billion next year after dividends.

Is the new Pfizer CEO, nominated last July, fit to lead the turnaround ? Wall Street Journal gives a positive write-up on Jeffrey Kindler and lists the challenges facing Pfizer. Kindler is an "inside outsider". He joined Pfizer in 2002 as general counsel and without previous experience in the pharma industry. He knows enough about the company to understand what needs to be changed but he isn't "steeped in the company's and the industry's creaky traditions". Last but not least "until the stock goes up 50% from where it was when he took office (around $26) Mr. Kindler's stock options are worthless".

What should do investors with Pfizer stock ?

The Peridot Capitalist makes a strong case to hold on to Pfizer . According to him it should be, at worst, a cash proxy yielding 4-5%. Any extra cost cutting efforts, positive surprises on the remaining pipeline, smart acquisition or dividend boost could provide an attractive upside.
On the other side, Marek Fuchs on TheStreet.com presents the bear's case.

Investopedia explains how to evaluate drug makers .

Money Magazine provides three strategies for health care investing after the Pfizer flop.

And now an interesting value play: Jim Clarke in an interview with Value Investor Insight suggests having a look at Cavalier Homes (CAV). The maker of manufactured houses 'fetching' $73 million market cap has a strong balance sheet. It still makes money in an industry at a 40-year low with only half of its plants operating. Downside is limited. If you apply to Cavalier Homes the multiple Warren Buffett paid for a competitor the stock has at least a 20% upside.

Vitaly Katsenelson relates a real life story which shows the similarities between successful gambling and successful investing.

Warren Buffett is in a great shape in this video of a speech to University of Florida students. Funny and insightful.

PFE 1-yr. chart

Pfizer Investment