The Long Case for Pfizer

I wrote earlier that the pharmaceutical industry as a whole is undervalued. One name that stands out above its peers in this $670 billion market is Pfizer (PFE). The company has taken a severe beating on Wall Street and is a bargain that cannot be ignored. The following are the investment rationale and potential risks to owning this company:

Rationale

• Trailing and forward P/E of 14.56 and 7.72, an all-time low
• Large size is an important competitive advantage over peers – marketing leverage, greater ability to make acquisitions and form alliances
• Deep breadth and depth of drug portfolio
• High foreign diversification – international sales accounted for 52% of 2007 revenues
• Dividend yield of 6.6%, highest in industry. Dividend also backed by $35 billion cash and $7 billion long-term debt
• Strong demographic growth in the elderly - approx. 18% of Pfizer’s sales from drugs for seniors
• Cost restructuring program expected to save $2 billion annually by end of 2008
• Industry and company concerns are already reflected in the stock price and good news are not. Any positive news will likely significantly increase the stock

Risks

• Lipitor patent cliff in 2011-2013, currently accounting for 26% of  total 2007 revenues
• Generics will continue to grow and seize market share
• Potential setback for the entire industry if Democrats win the next office
• Pharmaceuticals is a risky business – investing several hundred million dollars upfront for a short window of opportunity (approx. 10 year patent when you take into account the time to develop a test a drug)
• R&D productivity, pipeline failures and clinical trial risks

Disclosure: Long PFE

Comments

[WEBISKING:]

Well done I wrote a similar article about the best stocks to own and did refer to Pfizer

2008 Aug 24 02:47 PM

[proactivetr...:]

One of the ways to avoid a value trap (buying too early) is to use a chart. Bottom fishiers are always too early. It hurts performance when you are right and the market is wrong. The price keeps going down when it clearly should be going up. Wait until capital starts flowing into PFE, confirming the bottom is in place. For example don't buy here at 20 but wait for the next re-test of 18-19 and check money flow to see if the bottom is going to hold. I will be happy to send you the current Flow of Capital chart. email [e-mail] I tried pasting it here but it did not work. It shows capital is still flowing out of PFE but it is improving. It also shows that PFE will retest 18-19 again. And the market is about to start a short term selling cycle which will take PFE down with the DJIA.

2008 Aug 24 05:51 PM

[Urbane Gori...:]

Agree with flowofcap.... I never did understand people buying a stock on the way down.. The logic of buying a position in a freefall just escapes me. It's easy enough to get stopped out of anything moving up.

jegan ;-)

2008 Aug 24 07:32 PM

[vtwillard:]

John, there is no logic with buying plummetting stocks. However, approximately 125-year history of the mercantile and DOW markets shows that those who bought the more 'stable' dropping stocks, and held, came out well.

One example would be IBM, both before 1947 and before 1995 (but after 1990). See the charts behind both trends.

Another would be Apple; still another, Chrysler (circa pre-1980). I'm just throwing out a few examples that I know of; there are many more.

With that said, let me say it is more intuitive than logical to buy a 'dropping stock'. You have to have a strong belief - based mainly upon future market changes, rather than the balance sheet and current analyses on management - to determine if a 'free fall' condition is an opportunity to buy. In 95% of the cases, it probably is not.

JW

2008 Aug 24 08:34 PM

[weiwentg:]

Bruce Berkowitz of Fairholme recently made Pfizer a top holding. His rationale is that, aside from the market discounting the company's potential, their size and financial strength will enable them to form partnerships with, or acquire, the smaller companies that are developing breakthrough drugs.

We saw Pfizer attempting to do this by partnering with Nektar to develop and market Exubera, an inhaled insulin. Exubera failed, but it's hurt Nektar a whole lot more than Pfizer.

2008 Aug 24 09:24 PM

[mkreisel:]

People will pay ANYTHING for life-saving drugs; but people can lead perfectly happy lives without iPods.

That being said, the real concern for Pfizer is that it hasn't invented anything decent for almost a decade, despite burning billions and billions of cash in R&D.

2008 Aug 25 01:40 AM

[WorkerOnWal...:]

Re: flowcap's comments - as far as "Technical" analysis goes, _any_one can say _any_thing and show charts to "prove" it. I can also show charts to _dis_prove it.

We are at a time now where _every_one, from the smartest analysts and money managers, to the elementary school kid doing a portfolio management project, is using this kind of "Technical" analysis. But maybe - just maybe - the tide is turning in favor of fundamental analysis now. And maybe - just maybe - things like business plans, cash flow, cash hoard, product slate, R&D, stability, dividend, international presence.....all of that will matter.

As for the prediction that it will go down and "test the lows again"... who knows - or cares - it may or may not happen. The more important issue is upside vs. downside risk. My approach is to scale in slowly, and keep increasing my position if it continues to go down.

2008 Aug 25 04:53 AM

[David in En...:]

The comments in posts so far are all well known issues affecting PFE and other big pharma. The question is if PFE has learned a way to overcome them. They have been destroying value for 10 years. They do finally say that they realise they must turn themselves into a biotech company, but I'm not sure. They were always better marketers than scientists.

2008 Aug 25 05:03 AM

[mediapro:]

Every investor should heed "worker on wall street" comments. The one book on investing that sits with me to this day is Burton Malkiel's "A Random Walk Down Wall Street". He thoroughly destroys the notion of the predictability of chartists and makes a compelling case for broad market, long-term holdings.

Of course, there's no money in that strategy so he's totally ignored by the CNBC's of the world.

2008 Aug 25 03:25 PM

[WEBISKING:]

The investor who started buying this stock at 21 and "averaged in" every 7% down will end up doing great

2008 Aug 26 09:16 AM

[Finding Beta:]

weiwentg said: <<Bruce Berkowitz of Fairholme recently made Pfizer a top holding.>>

I think you mean Bristol Myers (BMY).

2008 Aug 26 05:41 PM

[mkreisel:]

No, PFE is the 2nd largest position at Bruce Berkowitz's FAIRX. Check out its SEC for yourself!

2008 Aug 29 01:39 AM

[mkreisel:]

Do you know that Burton Malkiel has bulk of his assets invested in BRK.A?

2008 Aug 29 01:40 AM

[mediapro:]

And BRK.A is simply a perfect fundamental model, not technical approach to choosing companies with a rather broad representation of the overall market.

Malkiel never suggests that everyone need take a total stock market investing approach. There will always be those -- sadly with me included -- who believe that they can outperform the total market. Historicallt, of course, that's wrong. More than 80% of active mutual fund managers regularly underperform the 5000.

He simply observes that chartists and their green-eye-shade myopics come and go, but that the efficient market theory is the best explanation for how the stock market works.

2008 Sep 07 04:02 PM