Is Pfizer the Cure for a Weak Market?

 

My friends, we are in tumultuous times. Markets are seemingly in freefall. During these times, the need for information surges. Blog viewership…through the roof. Google (GOOG) queries on all things financial…popping. Barrons…a bear on the front page. For some…this is an indication of a bounce. For others, this is an indication of a bounce…with a subsequent decline to new lows and the need to act in a capital preserving manner in terms of constructing a portfolio.

While there are a variety of methodologies to weather this storm I, as well as a multitude of portfolo managers and market prognosticators, turn to a proven panacea: 

DRUGS.

Yes Drugs. Those super dull, cash-printing pill-extruders that we ultmately succumb to in order to maintain and improve our quality of life. Here we can hide in the land of cash flow while we sort out the implications of the loss of financial leverage in our capital markets. Even better, I am thinking Pfizer (PFE).

Now, before you slip cement shoes on my feet and take me for a dip in the East River because of this:

Or This:

Ranbaxy to sell generic Lipitor in 2011

Hear me out.

Yes things look grim for big Pfizer. Below we can see some of the drugs and their contributions to overall revenues:

Source: Pfizer 10-K

Lipitor and Caduet account for $13B of the nearly $19B of Cardiac/metabolic sales. The latest 8-K filing from Pfizer denotes an agreement with Ranbaxy Pharmaceuticals for their sale of a generic version of Lipitor and Caduet by 2011. As evidenced by rapid revenue fall-offs post-generic from Zoloft (>70%) it is easy to see the concerns regarding future revenues and earnings for the company. While Chantix, Sutent, and Alliance revenues are growing rapidly in their own right, they do not yet have the heft to make up for what will be an anticipated shortfall of billions of dollars come 2011.

Yet this fear is well known. Furthermore, and this may come as a surprise, all is not negative at Pfizer. The pipeline is by no means dead. In fact, a bi-annual update at Pfizer’s website is available.

Also, the income shortfall is due in no small part to Pfizer’s decision to exit Exubera, as well as cost reduction initiatives from the Warner-Lambert and Pharmacia Acquisitions. In total, this accounted for more than $6B in charges.

In order to account for this effect Pfizer reports an “Adjusted Income” figure. As indicated by earnings guidance provided by the company, net income for full year 2008 is expected to be in the range of $1.78 - $1.93 (adjusted $2.35 - $2.45). The median of the NI range is approximately $1.86. PFE closed at $17.39 July 7. PFE is trading at a 6 month forward PE of 9.3 and an adjusted income PEG of 0.93, which is considered ideal in investing circles.

Source: Pfizer 10-K

Check out the MRQ Price to Book and Price to Cash Flow ratios:

Among its peers, PFE is a great value. Also the dividend yield, at over 7% presents a steady cashflow simply for holding the stock. Yes, the dividend yield is elevated due to the sharp drop in the stock, as well as the high payout ratio being indicative of the earnings shortfall. Yet, Pfizer has been increasing its dividend, not cutting it.

MRQ figures for select debt and equity ratios indicate PFE has not been financing operations with debt during this downturn…a predictor of less volatile earnings as well as less leveraged risk. Furthermore, the “Acid Test”, or Quick Ratio indicates PFE is well captalized to retire liabilites even in the face of shrinking sales. In a word: PFE is solvent.

Again PFE shares have been locked in a steady downtrend due to well defined headwinds. Yet, PFE remains one of the world’s most respected drug discovery companies. But in the end, drug sales will drive this company. Based on history…what will you believe?

I, for one, believe in PFE.

Disclosure: Author has no position in PFE

 

Comments

[Jason Rines...:]

I own a business in Consumer Healthcare Marketing. Big pharma is great if you plan to buy and hold for five years+. Big pharma is currently spending money building new pattents. To do that it means clinical trials. I noticed an article about the FDA opening three new offices in China. I believe most of the trials will be conducted in China and India, but am seeing a modest boost in that clinical trials domestically. The current House is making it tough for big pharma to invest domestically.

To me, it is worth waiting to see whom controls government in the US before buying big pharma stock. If it's Democrats, I won't buy until I see a change in attitude towards big pharma. If Republicans win President but do not control Congress, forget it.

Dennis Hastert, set-up physician marketing with big pharma with a stroke of the pen in 2000. President Bush passed increased drug coverage/medicaid benefits in 2004. Growth in big pharma saws nice gains until about 2006. Growth for big pharma is projected at 3% next year. Democrat controlled House in 2006 threatened big pharma to give steep discounts on drugs or face the wrath. Big pharma will wait it out for this kind of leadership to exit Washington in general, but I have a feeling some of the clinical trial companies in Chindia will be worth looking at in the short-term.

2008 Jul 21 05:59 PM

[truthinvesting:]

I think JNJ is a better investment because of the consumer goods and medical devices as well as pharma.WEB invested 4 billion

2008 Jul 21 07:36 PM

[Stock_doc:]

I think this fear of Democrats in the White House tanking big pharma is blown way out of proportion. Obama absolutely buries McCain in campaign contributions from Big Pharma. Look it up.

2008 Jul 22 01:02 PM

[morgan77:]

Great Article- I believe that PFE is a safe bet right now.
There may be some pipeline issues but I'm comfortable with PFE because of their history..
PFE has a flawless 41-year history of dividend growth and stands to benefit big, along with the entire drug industry as Medicare Part D kicks in over the next few years.
Here's an article by PFE supporter if you're interested in the dividend and management.

www.greenfaucet.com/tr...

2008 Jul 23 02:53 PM