Pfizer: You'd Have to Be Sick to Touch This Drug Stock

Includes: JNJ, MRK, PFE
by: Benzinga

By Roger Nachman

Don't people buy stocks because they think the stocks will go up in value?

Well not Pfizer (NYSE:PFE) shareholders. If you're a Pfizer shareholder, maybe you need the company to develop a drug that makes you smarter, because it certainly isn't making you richer.

Take a look at a 5 year chart of PFE.

It's done nothing but go down. Yes I know that Pfizer pays a steep dividend yield, currently at 4.5%. So investors should feel some stability in holding these shares. But if investors just wanted to hold for stability, they'd pour money into bonds.

When you hold slow-moving, dividend paying stocks, you expect slow or sometimes stagnant share price appreciation. You don't expect eroding losses in the share price.

Take a look at this 5 year chart comparing Pfizer, Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK). Notice something?

It's the putrid performance of Pfizer.

There's a case for the bulls here, but I'm just not buying it. Pfizer is historically cheap at these levels, trading at just 7 times forward earnings. It's a favorite of hedge funds. The Wyeth acquisition will lead them to a new growth phase. Things have to get better. Yada, yada, yada.

The company has a rock solid balance sheet, with over $19 billion in cash. Unfortunately, it just isn't using this cash in the right way.

Its return on equity is an anemic 10.8%, compared to the high 20's for for Merck and J&J.

If you're not operating your company correctly, maybe it's time for a change at the top of the business structure.

The reason Pfizer bought Wyeth for $68 billion last year was the staggering number of patents expiring, and Pfizer needed something to fuel its growth. Its major drug Lipitor is set to expire next year, and this has been a huge concern on Pfizer, obviously weighing down shares.

Well, it doesn't appear this is working, at least the market is betting it isn't, and I tend to agree. Maybe CEO Jeff Kindler needs to be replaced. Maybe instead of growing, the company needs to separate itself into parts to recognize shareholder value.

Something has to be done and soon. Investors can't keep receiving the anemic performance that Pfizer has offered over the past 5 years. I would not be surprised if a group of activist investors took a large stake in Pfizer to try to shake things up. The company is too big for one activist shareholder, but maybe two or three could do something.

Barring this happening, investors would be keen to look elsewhere as Pzifer has major concerns going forward, and in my opinion, isn't worth the packaging its drugs are put in.

Disclosure: No positions in companies mentioned