Pfizer (PFE) had a good quarter in terms of earnings, but it would be shortsighted to look at this as a good long-term sign. When we look at revenue, we get a better picture of what is happening with the company. Pfizer's revenue also fell short. At $15.4 billion, it fell short of analyst expectations of $15.47 billion and came in at 6.7% less than the same quarter last year. Without having to mention too much about Lipitor and its effect on the company's income, Pfizer looks like a company floundering to keep investors at the present time, but one that has good long-term potential.
Analysts are not expecting a lot of growth out of the company in the next few years. They are estimating earnings growth of just 2.56% a year over the next five years, compared with expectations for its industry of almost 7%. With this in mind, we can observe actions by Pfizer that paint a picture of a company focused on pleasing of investors for the short term.
Cutting Research and Development
The news about cutting research and development (R&D) is nothing new. It was reported back in February of 2011 that the company would be cutting its R&D budget in 2012. But one can hardly blame the company for such actions. As it prepared for billions in lost revenue coming into 2012, Pfizer was preparing to cut about 25% out of the R&D budget, which is its greatest expense. Cuts needed to be made and the downsizing may not turn out to be so bad for the company in the long run. But 2012 looks like a year where Pfizer is preparing itself to deal with a future without Lipitor and other major brand name revenue.
Being in the middle of a repurchasing program confirms the company is making adjustments this year. On one hand, this is another attempt to keep investors happy. After a buyback, each share now becomes more valuable because each share now holds a greater percentage of ownership in the company. The laws of supply and demand go into effect. There is an increase in demand for the company's shares of stock by the company itself, and perhaps other investors as well, while the supply is being reduced. Thus, economic theory states that prices will rise as a result. From another viewpoint, a share repurchase program is especially troubling to "growth" investors, who own the company because they see high potential future growth in both the company's revenue and profit. This is true, but only in the short term.
So between the cost-cutting measures in R&D and the buyback program, it looks like Pfizer is spending this year working through the big revenue changes that started last fall for the company. It is a very strong company with good potential, and I believe it will get through this year well-managed. I look for long-term growth to continue going into 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.