The Long Case for Pfizer 14 comments
August 24, 2008
| about: PFE
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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
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This article has 14 comments:
jegan ;-)
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
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.
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.
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.
Of course, there's no money in that strategy so he's totally ignored by the CNBC's of the world.
I think you mean Bristol Myers (BMY).
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.