Pfizer Trading Below Reproduction Value

Nov.14.10 | About: Pfizer Inc. (PFE)

Pfizer Inc. (NYSE:PFE), a biopharmaceutical company, engages in the discovery, development, manufacture, and marketing of prescription medicines for humans and animals worldwide. It is the world's largest pharmaceutical company, with annual sales of more than $60 billion. Following the acquisition of Wyeth, prescription drugs now account for close to 90% of sales. Its product line include products like Lipitor for elevated cholesterol levels, and Norvasc for hypertension

Pfizer's stock price has been between $46 and $12 over the last 10 years. The graph below provides a trend of the stock price over this period (based on the last day of the year).

Graph 1: Pfizer stock price – 10 years

Graph 1: Pfizer stock price – 10 years

Let’s take a look at the trend of key financial data and ratios over the same period.

Graph 2: Pfizer key financial data – 10 years

Graph 2: Pfizer key financial data – 10 yearsClick to enlarge

Graph 3: Pfizer key ratios – 10 years

Graph 3: Pfizer key ratio’s – 10 yearsClick to enlarge

Return on equity was more than 47% in 2002 and has come down in the last 8 years to around 11%. Overall, the key financial ratios have been trending down. Pfizer remains a company with strong cash flows and a broad portfolio of patent protected drugs. We’ll try to value the company against reproduction cost to determine if the company against current share price (around $16 - $18) has value.

To get from the current book value to the reproduction cost – the amount of $ it would take a competitor to get into this business – we’ll make the following adjustments:

  • Include 4 years of R&D spending (conservative assumption that it takes on average 4 years to develop new products

  • Include 3 years of 75% of the SG&A cost to market and sell products

  • Adjust for excess cash and investments not required to run the business

The above adjustments to the book value give a reproduction cost of around $19. Graph 4 compares the stock price against book value and reproduction cost over the last 10 years.

Graph 4: Stock price, book value & reproduction cost
Graph 4: Stock price, book value & reproduction costClick to enlarge

Pfizer, with its current stock price of between $16-18, is trading below its reproduction value. This might make it an interesting investment to consider.

Disclosure: No position in PFE