Pfizer: A Good Defensive Stock Pick

Jan.20.12 | About: Pfizer Inc. (PFE)

Pfizer Inc. (NYSE:PFE) is the world's largest biopharmaceutical company. The company provides healthcare and drug products and services through two segments: biopharmaceutical segment and diversified segment. Pfizer plunged to its 52-week low in late August. Then, it rapidly rallied and returned a decent 29% in 2011, which beat the market to the ground. Now the stock is trading at nearly $22 per share.

On January 13, 2012, Nestle SA (OTCPK:NSRGY), Danone SA (OTCQX:DANOY) and Heinz Co. (HNZ) made proposals for Pfizer Inc.'s baby-food business. This division of Pfizer Inc. may be worth approximately $10 billion. On January 10, a chief executive said that Pifizer's cholesterol drug Lipitor is holding about 37% to 38% of the overall U.S. market, which is in line with the company's expectations. The company still hasn't reached a conclusion on whether to sell or spin off its animal and nutritional health units. On January 9, analysts at Goldman Sachs (NYSE:GS) reaffirmed a "conviction buy" on Pfizer in its research note to investors.

Peers Comparison

Pfizer has a market cap of nearly $170 billion and is trading at a 9.5 forward PE. Its EPS is expected to grow at 5% annually for the next five years, while it has a dividend yield of 4%. The stock is defensive due to its comparatively low beta - 0.89. S&P gives a buy on Pfizer with a 12-month price target of $24, or 10% return. Thomson Reuters suggests a neutral score of 7 on a 1-10 scale, while Market Edge offers a "long" based on technical indicators.

Johnson & Johnson (NYSE:JNJ) is a global pharmaceutical company and operates three business segments: Consumer, Pharmaceutical and Medical Devices and Diagnostics. The company has a market cap of $178 billion, and trades at a forward PE rate of 12.5. The company has an expected EPS growth rate of 6%, and a dividend yield of 3.5%. The stock has an even lower beta than Pfizer - 0.55, and gained 10% in the past year. S&P gives a buy on JNJ and recommends a 12-month price target of $73, corresponding to a 12% return. Thomson Reuters scores it 7 on a 1-10 scale. Market Edge recommends a long.

Merck & Co., Inc. (NYSE:MRK) is also one of the largest global healthcare companies. It has a $118 million market cap, and trades at a beta of 0.54. It currently has a forward PE of 10, and an expected EPS growth rate of 3%. In addition, Merck has a 4.4% dividend yield. The stock gained 10% in 2011. S&P recommended a buy on Merck with a 12-month price target of $42, or 10% return. Thomson Reuters recommends a 7 on a 1-10 score scale, and Market Edge gives a long opinion.

Hedge Fund Positions

The total hedge fund investment in Pfizer was $3.8 billion, spread across 74 hedge funds' portfolios, based on hedge funds' 13F reports at the end of September. Ken Fisher, whose Fisher Asset Management had nearly 22 million shares of Pfizer, had $389 million investd in Pfizer. Frank Brosens' Taconic Capital came in second place. The firm had 15.5 million shares after it boosted its position by 43% during the third quarter. Jeffrey Tannenbaum, David E. Shaw, Cliff Asness, and Steven Cohen also had several million shares in the stock in Q3.

There were 57 funds invested in JNJ during the third quarter, with totally $5.32 billion. Over the same quarter, 42 hedge funds invested in Merck, and the total hedge fund investment was just above $1 billion.

Conclusion

Compared with JNJ and MRK, PFE has a higher risk level, but all three stocks pay attractive dividends and have fair EPS growth rates. Based on their forward PE ratios, PFE is slightly undervalued compared with JNJ and MRK. This might be because investors are willing to pay premiums for PFE's potential spin-off in the future. All three stocks attracted a significant number of hedge funds in the third quarter.

Overall, these pharmaceutical stocks are defensive and should be included in well-diversified portfolios. While we hold positive opinions about each of these stocks, we like PFE more. In addition to PFE's upside potential, investors can choose this stock to hedge against the Fed's ultra-low interest rates. The 4% dividend yield stock will surely be better than the U.S. 10-year Treasuries over the next 10 years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.