Merck, Pfizer, Amgen Earnings Previews: Fully Valued, Capital-Allocation Stories

Includes: AMGN, MRK, PFE
by: Brian Gilmartin, CFA

Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Amgen (NASDAQ:AMGN) report their calendar 2nd quarters on Tuesday, July 30th, with PFE and MRK reporting in the morning, and AMGN releasing their results after Tuesday's closing bell. The following is a quick preview of each company's expected numbers and results for Q2 '13 and for full-years 2013 as well.

Pfizer: No surprise that the patent expiration of Lipitor has seen that drug's revenues decline between 50% and 80% for each of the last 5 - 6 quarters, but remarkably, the stock began to rally just as Lipitor went off patent.

Street consensus for PFE is expecting $0.55 in EPS on $13.03 billion in revenues for expected year-over-year declines of 8% and 14%, respectively. PFE has had no EPS or revenue growth for quite some time and yet the stock is up 28% in the last 12 months and up 18% year-to-date. The Zoetis spin-off is now complete (we kept all of our PFE and didn't exchange any). The key drugs on Tuesday's call are likely to be Prevnar-13 and Palbociclib for breast cancer.

Earnings and revenue growth through 2015 are looking for mid-single-digit growth in EPS and slightly negative revenue growth, so the 14(x) multiple today is pretty average on the 2013 EPS estimate. Morningstar puts an intrinsic value on PFE of $30 per share, while our internal model values PFE at $31, so there could be some upside to the stock, but all the good news seems priced in.

With a 7% free-cash-flow yield and better than 3% current dividend yield, PFE can be held by the dividend crowd although there is little growth forthcoming unless one of their pipeline drugs is an unexpected blockbuster. PFE is returning 80% - 90% of its $15 to $16 billion in free-cash-flow in the form of dividends and share repurchases to shareholders.

A trade above the April '13 high of $31.15 on volume, and the stock could run again, but it is hard to tell today what that catalyst might be.

Merck: Tuesday morning, consensus EPS and revenue expectations are for $0.83 in EPS on $11.2 billion in revenues for expected year-over-year declines of 20% and 9%, respectively for the pharma giant.

Januvia has already more or less deflated the quarter for Merck shareholders. BMO Capital Markets downgraded MRK based on worries over Januvia losing market share to JNJ's Invokana, in a note dated July 18th. Frankly, from a sentiment perspective, I think this helps the stock since it depresses expectations into the release tomorrow.

Merck is identical to PFE in that both stocks have 3.5% dividend yields, MRK has a 6% free-cash-flow yield, and both have 14(x) PEs on the expected 2013 EPS estimate. MRK is currently returning 100% of its $7 - $8 billion in free-cash-flow to its shareholders via the dividend and share repurchases.

Morningstar, using their conservative discounted cash-flow model, values MRK at $52 per share, almost exactly where our internal model values MRK. MRK needs to trade above its June '13 of $50.15 on volume to break out once again.

Amgen: Flat revenue growth is expected to generate 5% EPS growth Tuesday afternoon for the biotech giant, as AMGN continues to be repurchase large gobs of shares.

The big difference between AMGN, and PFE/MRK is that analysts are actually expecting some revenue and EPS growth the next few years, with consensus out to 2015 expecting 4% - 5% revenue growth and 10% - 15% EPS growth. Trading at 15(x) current 2013 consensus EPS of $7.29 AMGN has only a 1.5% dividend yield to MRK / PFE's 3.5%, thanks to AMGN management focusing on share repurchases over the dividend.

Since December 2010, when AMGN had 960 million shares outstanding, the biotech giant has reduced their shares by 20% to 764 million as of 3/31/13. Key drugs are Prolia and XGeva, with Enbrel and Neulasta still 25% of revenues each.

A trade over April 23rd's high of $114.95 and AMGN breaks out once again. Morningstar has an intrinsic value on AMGN of $115, while our internal model values AMGN at $130.

AMGN has the best expected growth of the 3 names.

Conclusion: With the exception of AMGN, very little growth is expected for any of these names, and all three are cash-flow and free-cash-flow rich with dividends and share repurchases in full swing.

All three of these names are capital-allocation stories with much hope for the pipelines, (which could in fact pay-off) although their current market values, with the possible exception of AMGN, fully discount their discounted cash-flow valuations.

PFE, MRK and AMGN could work if we see a correction in the stock market over the next few months.

Of the three, I would rank their potential total return over the next 3 - 6 months, based on fundamentals and technicals:

1.) Amgen

2.) Merck

3.) Pfizer

It isn't that we have anything against PFE, it is just that with the Zoetis IPO, there is a lot of the good news in the stock. The share repo plan has been fully discounted and the dividend increase is predictable. The drug pipelines will be the next major catalysts should some of these drugs hit, particularly for MRK.

Disclosure: I am long AMGN, MRK, PFE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.