The Long Case for Pfizer

Aug.24.08 | About: Pfizer Inc. (PFE)

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 (NYSE: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