Pfizer (PFE) reports earnings Tuesday morning, July 31 before the bell, and if Merck's and Amgen's earnings are any indication of how the Street is reacting to large-cap health care earnings, PFE shares represent more reward than risk over the foreseeable future.
Analyst consensus is expecting $0.54 in earnings per share on $14.9 billion in revenues for expected year-over-year declines of 10% and 13%, although the 2011 figures may still include the Nutrition business, which was sold to Nestle early in 2012.
No question the large and mega-cap pharmaceutical business is starting to stir after 13 years of steady declines and dormant returns. Pfizer hit an all-time high of $49.99 in June of 1999, and then again traded at $48 - $49 in 2000 and January 2001, only to begin a slow descent into investing obscurity and underperformance over these last 12 years.
However the animal spirits have begun to flow once again in large-cap pharma the last 9 months as the stocks have started to outperform the S&P 500 on robust dividend yields (3.5% - 4%), M&A activity, share repurchases and depressed values for future drug pipelines.
For Pfizer in particular, while the forward estimates hold little enthusiasm for growth investors, the sale of the Nutrition business to Nestle, which netted $12 billion, meant that some of those proceeds went to the share repurchase plan. Some analysts think that PFE's Animal Health business is worth $8 - $14 billion, and that the Consumer Health business acquired as part of the Wyeth acquisition is worth between $6 - $10 billion. If these businesses are divested or spun-off (and that seems to be the chatter amongst the Street, and let's assume the mid-point of the valuations are realized prices), the divesting of both units would net PFE $19 billion, and if just half of the proceeds went to the share repurchase plan, at today's stock value, $9.5 billion could repurchase 400 ml shares or 5% of the shares outstanding.
Just between 12/31/11 and 3/31/12, PFE repurchased 3.5% of their outstanding shares, (7.598 billion versus 7.870 billion) or roughly $6 billion of market cap.
Forward estimates are uneventful for Pfizer given current consensus estimates:
2011 - $2.31 (actual)
2012 - $2.21 (current consensus)
2013 - $2.32 (current consensus)
2014 - $2.43 (current consensus)
2015 - $2.54 (current consensus)
2016 - $2.62 (current consensus)
Arithmetically, between 2012 and 2016, PFE's earnings per share are expected to grow about 3.5% per year, and revenues about the same - totally unexciting.
So why the sudden interest in the group ? Well, as we wrote in our Merck (MRK) and Amgen (AMGN) preview last week, the sector is a function of very low expectations, improving technicals and attractive valuations.
PFE is trading at 10(x) 2012 and 2013 estimates, with a share repo plan that will limit the downside ($7.5 bl was left in the plan as of 3/31) and low valuations assigned to pipeline values. Mark Schoenebaum, the outstanding pharma analyst at ISI Group, has said in his writings on the sector over the last 6 months that the l/c pharma stocks could see decent upside since it looks as if current valuations assign just a 5% probability of success to pipeline drugs for PFE and MRK.
Lipitor lost brand exclusivity last fall for PFE, and that drug alone represented 10% of PFE's total revenues. Lipitor sales fell 42% alone in q1 '12, and according to a note out of Trefis, by the end of 2013 10 blockbuster drugs of PFE's are expected to lost patent exclusivity, with the point being that there is tremendous skepticism around the shares based on what is known (the current drug in the market) versus the unknown (the pipeline).
In 1999, with the release of Viagra, PFE was earning $1 a share, trading in the mid $40's (44(x) - 45(x) earnings) and everybody loved it and fell all over themselves to own it. Today, PFE trades at 10(x) earnings with a 4% dividend yield, and is up 8.5% year-to-date (excluding the dividend) and no one wants to own the stock.
Divestitures, strategic acquisitions, better capital management and now CEO's which are focused on expenses and generating better returns for shareholders, are once again lighting a fire in the sector. For PFE we'd feel more comfortable if eps estimates started to gravitate closer to $3 per share, with some organic growth, but we like the share buyback as downside protection for the stock.
A lower-risk entry point for Pfizer would be under $20 in our opinion, but the way the group has traded, I'm not sure it gets there.