Pfizer: Low Expectations Make Great Investments

There is a difference between a great company and a great investment. Though they are many times one and the same, a great investment comes from paying the right price for a business that you understand. More often than not, the right price presents itself when short-term business issues distract the market from the true value of the business.

Pfizer (PFE) is a longtime industry leader, though not exactly “great” today. Its number one issue is the impending loss of Lipitor and the lack of meaningful late stage pipeline candidates to replace that significant loss.

One of the few bright spots today at Pfizer is the price at which today’s investors can buy the stock. At an $18 stock price, Pfizer shares are selling at a 32% discount to their estimated current value of $26 (using discounted cash flow analysis).

In addition, the stock has a dividend yield over 7%. In contrast to other high yielding companies with shaky balance sheets, Pfizer has $29 billion in cash and short term investments as of the most recent quarter. The dividend is secure.

Assuming that an investor buys shares today at $18 and holds them for three years, the compound annual growth rate of the total return (stock price appreciation plus dividends) is 20%. It’s worth noting that this analysis does not imply improved business conditions at Pfizer. It highlights that the stock is now being hated to the point where it has become irrationally priced and a worthwhile investment for those with a long-term focus.

Disclosure: Author holds a long position in PFE

Comments

[Archman Inv...:]

Nice pump.

You probably got in around $26 and need the stock to get back to that point to break even.

The stock is absolute garbage, however the thing has been beaten down so much it is due for a run. So I guess now is as good a time as any for some asset gatherer to show up and do a pump and dump article on PFE. I guess after the beating this stock has taken the chances of you being wrong are pretty slim (though you never know)

Do yourself a favor, when it gets back to your break even point, sell it.

That way we do not have to endure these self serving, pump and dump articles

2008 Jun 18 08:01 AM

[lakeside:]

I agree; GE has been a real disaster. There are a hundred and one (101) energy related stocks that you could talk about -- a lot of newbie investors are getting burned by articles like these.

2008 Jun 18 08:45 AM

[Semper Gumby:]

I read an article with the same logic last year at $25. This stock has been on my list for quite a while. However, there has been no catalyst that will get this stock moving. They might as well call themselves what they are. A poor performing hedge fund.

2008 Jun 18 08:47 AM

[hermanbrut:]

I've been thinking about PFE lately, too. There isn't much downside here. People seem apprehensive because their patents are running out.
But with $11 billion net cash ($28 billion cash—$17 billion debt), why can't Pfizer just buy several companies that have new blockbuster drugs in the pipeline? They have a couple years to do this before their own drugs go off-patent. I think they are waiting and watching right now.
What's wrong with my thinking?

2008 Jun 18 08:49 AM

[Archman Inv...:]

why not CRDC:

There is nothing wrong with your thinking. But the "stock" of PFE is crap VS the company. Until the stock starts acting better, what the company does, is not influencing the stock.

2008 Jun 18 08:59 AM

[Tom B:]

The stock could be purchased at a greater discount later. Lipitor goes off-patent in 2010; Celebrex-- 2012, I think. I like PFE in the long term-- but only on a 5 plus year time horizon. I wouldn't buy any NOW.

2008 Jun 18 09:47 AM

[Joyful Alte...:]

I like high, pretty secure dividends, and I bought some.

2008 Jun 18 10:57 AM

[batjak1:]

I bought PFE at the low a few months ago. My Merrill Lynch advisor has guided me and so far so good. He feels any purchase of a blue chip stock for no more than a 10K investment in the long run is the right choice.

2008 Jun 18 12:01 PM

[joe p:]

True PFE stock and company performance (ie. successful new introductions of drugs) has been poor, but 7 percent in dividends plus a stock near its 52 week low is probably worth having in your portfolio. Remember, PFE was the best stock of the 90s. My guess is it will get back to the mid 20s during the next year...and in the meanwhile you earn 1.22 per year for every share you own. Just a guess of course...but this is a pretty safe play.

2008 Jun 18 12:23 PM

[ertsfan:]

PFE should use some of their cash horde to buy some biotechs to do something about their pathetic pipeline. PFE's labs are useless. Great looking chart -- for shorting.

2008 Jun 18 10:40 PM