Pfizer's Valuation Metrics Show Limited Downside Risk

Pfizer (PFE) is hard pressed to generate growth as it deals with lack of a significant pipeline and stands to lose Lipitor’s exclusive patent in March 2010. After a series of disappointments with Torcetrapib, Asenapine, Promune, Exubera, Dalbavancin and Tremelimumab, many investors have abandoned the stock. To address its bottom line over the near-term, PFE is currently engaged in cost-reduction and share buyback programs. For sustainable long-term growth, it will probably have to consider investments or deals with other drug or biotech companies. It should be noted that in 2007, PFE set aside $17bn cash for acquisitions and has yet to fully deploy it.

Despite its uphill battle, as of July 23, 2008, PFE posted solid 2Q second quarter financial results and reaffirmed it 2008 guidance for 9% to 11% EPS growth @ $2.35 and $2.45; and revenues @ $47bn to $49bn. It reported  6% better revenue @ $12.075mm vs. $11.373mm estimates for a 9.4% increase (2.4% increase if excluding foreign currency benefits) compared to last year and adjusted-EPS (adjusted for non-recurring and charges related to productivity initiatives) of $0.55 vs. $0.54 consensus.

A breakdown of annual performance of operating divisions is as follows:

1. Pharmaceutical sales up 9% (2% excluding the impact of foreign exchange);
2. Animal Health sales up 13% (5% excluding the impact of foreign exchange);
3. Alliance sales up 44%; and
4. Other sales up 4%.

At its current valuation and recent bounce off its 52 week low, there’s not much downside risk to its share price. The stock trades at 8.1x 2008 earnings and sports a dividend yield at 7%. From a technical perspective, the stock broke out yesterday to clear resistance at 18.60 on surging volume (see chart below). Fundamentally, the stock lacks a catalyst, but a strategic acquisition would demonstrate the company is back on track for long-term growth.

 

Summary

For patient investors, a 7% dividend yield in a stock that appears to have already discounted negative events into its share price offers quite a favorable risk to reward opportunity for either traders or investors.

Disclosure: Author does not maintain a long or short position in any of the above related securities.

Comments

[robert99:]

Agreed. Buy it, set it on a DRiP, and forget about it. In 30 years when you retire, your annual dividend income from your PFE will be much, much more than you paid for the original stock.

2008 Jul 25 09:09 PM