by Larry Gellar
On an otherwise dreary day for the markets, Pfizer (PFE) announced Monday that Nestle (NSRGY.PK) will buy the company's highly coveted infant-nutrition business. Once the downward momentum from negative news in Europe subsides, I highly recommend investors take a look at Pfizer's stock. This was a crucial step in Pfizer's plan to focus more on developing new medicine, and $11.85 billion was probably the highest price the company could have gotten. (Many analysts were speculating that the unit would sell for around $10 billion.)
While I will talk about how this news and other trends make Pfizer a great pick right now, I would be remiss not to mention Nestle briefly. Indeed, Nestle stands to benefit from Pfizer Nutrition greatly because 85% of the unit's sales are in emerging markets, which is exactly where Nestle would like to expand. Nestle hopes to improve its brand name in populous countries like China, and I fully expect this deal to help accomplish that. Additionally, Nestle CEO Paul Bulcke had this to say about the deal:
Infant nutrition has been at the heart of our company since it was founded in 1866. Pfizer Nutrition is an excellent strategic fit and this acquisition underlines our commitment to be the world's leading nutrition, health and wellness company.
That may sound like a bunch of PR nonsense, but it really is true -- I can't think of a better addition to Nestle right now than Pfizer Nutrition.
Now let's get back to Pfizer, beginning with what its ratios are looking like. Admittedly, Pfizer has the highest price-to-earnings ratio (20.28) when compared to GlaxoSmithKline (GSK), Merck (MRK), and Abbott Laboratories (ABT). That can sometimes be a red flag, but I think Pfizer's solid potential for growth should outweigh any concerns in that area. Additionally, the stock's price-to-sales ratio (2.52) is near average for the industry, so that's a good sign. I'm impressed with some of Pfizer's margin statistics as well. Gross margin of 77.63% and EBITD margin of 34.13% beat out the same numbers for GlaxoSmithKline, Merck, and Abbott Laboratories, and the company's operating margin of 18.93% is not too shabby either.
While the Pfizer Nutrition transaction was certainly a good event for the company, it is worth noting that Pfizer has a bit of a dark cloud hanging over it in a different area. Indeed, I am referring to the latest news surrounding its Prempro drug, which has unfortunately brought out a number of lawsuits. One plaintiff is Margaret Fraser, and jurors in Connecticut have now found Pfizer to be liable for the woman's breast cancer. Of further concern is that Pfizer supposedly mishandled its marketing of the drug. Here's what Pfizer spokesman Chris Loder said about the decision:
We are disappointed with the verdict and will evaluate our legal options once the court completes its work in this case. Since the case is continuing, it would not be appropriate to comment any further at this time.
From what I can tell, Pfizer's legal efforts here will be an uphill battle. Fortunately for shareholders, though, the amount of money involved is not tremendous. In fact, a jury in Philadelphia found three women deserving of $72 million, but Pfizer was able to settle the case for a presumably less amount. Also, Pfizer has allocated $772 million to resolve Prempro claims, and this should be far more than enough.
This is not Pfizer's only recent legal issue, however. The company purchased Quigley back in 1968, and litigation against that subsidiary for its asbestos contamination is still haunting Pfizer. While Quigley filed for bankruptcy in 2004, Pfizer has been ruled to be still liable under Pennsylvania law. The main problem is that Pfizer had its logo on Quigley's products, although Pfizer may still have options. Again, Chris Loder was the relevant spokesman for Pfizer, and he had this to say:
It is important to note that the court's ruling is procedural and does not address the merits of the underlying claims, which we strongly dispute. In the history of this litigation, Pfizer has never been found derivatively or directly liable for injuries allegedly caused by Quigley's asbestos-containing products.
Although it appears that Pfizer is not setting aside special reserves to deal with this litigation, I'm not particularly concerned. Pfizer's large cash reserves and prior experience in dealing with lawsuits should ensure its financial viability regardless of what happens.
Another situation that Pfizer has been dealing with is unpopular employee severance package cuts. While these cuts are certainly unfortunate for the company's employees in these tough economic times, I think that shareholders can benefit from these efforts. Specifically, the amount of time that laid off employees receive severance pay and health benefits is being reduced, although Pfizer's benefits are still pretty good by my estimates. Pfizer is a strong company, but costs must be lowered for it to stay competitive with the rest of Big Pharma. Fortunately, the company was able to reduce expenses by 5% in 2011.
Overall, while Pfizer obviously has some legal issues to resolve, the company appears to be on the right path until it finds a replacement for the revenue behemoth that Lipitor was. Pfizer's stock offers great dividends too -- the dividend yield is currently 3.9%. Considering Pfizer had $20.24 billion of operating cash inflow during 2011, leading to a net cash inflow of $1.804 billion, it's clear that Pfizer's dividends will be coming for quite some time. Furthermore, I'm enthused about Pfizer's newest medicines -- drugs such as Prevenar, Eliquis, tofacitnib, Xalkori, and Inlyta certainly have the power to add significant value to this franchise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.