Seeking Alpha
Special situations, micro-cap, biotech, healthcare
Profile| Send Message|
( followers)  

Shares of Pfizer (NYSE:PFE), the world's largest pharmaceutical company, experienced a bit of a slide following its mediocre Q4 2011 report on January 31, which I examined in greater detail in my last article about the company. Lipitor's expiration in November 2011, naturally contributed a lot to the relatively weak revenue from Pfizer's pharmaceutical division, as expected. This is including very favorable conditions in the forex market, which has softened the blows to the biopharmaceutical division's quarterly numbers.

Revenue for the cumulative year of 2011 relative to 2010 ended up growing only 1% as a result, although net income increased 21% in 2011 due to some strong cost-cutting efforts by the company. The company's net profit margins stand at about 8.5%, so there is enormous room for improvement and hence share appreciation based on company fundamentals. The current P/E ratio of 19.5 won't last much longer if Pfizer continues its renewed efforts on bottom-line growth. Lastly, dividend investors should be thrilled about this strategy since increases in cash flow make it much easier for boards to approve those dividend hikes we all love.

In addition, after much talk and speculation in the news about Pfizer's intentions to sell its animal health division for anywhere between $14-$20 billion to a host of other major pharmaceutical companies, CEO Ian Read claimed that the company is more likely to simply spin off the division into a separate company. Although the massive pile of cash that Pfizer would have generated from the sale of this division would have been great news for the dividend investors, one has to keep in mind that animal health has been one of the fastest-growing revenue streams in the industry during recent quarters. In the Q4 2011 report, Pfizer's animal health division generated 13% higher revenue relative to Q4 2010 - beating the overall growth of the company's revenue (1%) by an enormous margin.

Another way that Pfizer seems to be working on its top-line growth problem is through a string of strategic acquisitions that have exhibited strong growth potential. Its recent buyout of Alacer, which makes dietary supplements and nutrition products, is a sign that the company is chasing that particular submarket's growth. Again, referring to the Q4 2011 report, Pfizer's nutrition division grew the fastest (22%), bringing in $598 million. Alacer's cleverly named Vitamin C supplement "Emergen-C" is expected to be a good addition to Pfizer's product line.

So, while the slowdown in Pfizer's revenue growth spooked investors a bit throughout February, causing a painful sell-off during a broader market rally, shares are now on the rebound as the generally ignored rate of bottom-line growth suggests the potential from a much more favorable P/E ratio in future quarters alongside dividend hikes. Pfizer also seems to be pursuing a fairly aggressive revenue growth strategy at the same time, which should keep the company's expansion sustainable. This is not accounting for the enormous demographic potential in emerging markets and the United States, which should benefit the healthcare industry tremendously over the next few decades.

This is a buy-and-hold stock that should shield your portfolio well in the case of a macroeconomic slowdown that could send other stocks plummeting. The company has been diligently working on its recent shortcomings, and the recent wave of patent expirations has already been fully baked into the stock. I don't think the analysts are too far off on this one - the shares shouldn't have too much trouble reaching $25 apiece in the medium-term assuming that there are no traumatic events in the broader market. Lipitor's expiration is behind us, and a plethora of new drugs are already in phase III trials.

Best of all, as a broad play on the healthcare industry, Pfizer is a an incredibly defensive investment despite its appreciation potential. Conflicting macroeconomic data suggests that we might want to be more conservative with what we invest in these days. Healthcare is one sector you will be glad you are invested in if GDP data continues to disappoint.

Source: Why Pfizer Is One Of The Best Defensive Plays On The Market Today