Pfizer Remains Significantly Undervalued

| About: Pfizer Inc. (PFE)
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On Tuesday, Pfizer (NYSE:PFE) posted decent second-quarter results. Though revenue declined 9% from the same period a year ago, adjusted diluted earnings per share advanced 5%, bolstered by share buybacks and cost cuts. The firm also announced that it has filed a registration statement with the Securities and Exchange Commission for an initial public offering of up to a 20% stake in its animal health business, Zoetis. We liked the performance during the period, have no qualms with the proposed IPO as it allows the firm to focus on its core pharma business, and think the shares remain significantly undervalued. We have exposure to Pfizer through the Health Care Select SPDR ETF (NYSEARCA:XLV) in the portfolio of our Best Ideas Newsletter.

Pfizer continues to face pressure from the loss of exclusivity of Lipitor in November of last year, as US revenues fell 15% from the same period last year. International revenue faced pressure from unfavorable currency movements and dropped 5% in the quarter. The company's Established Products and Emerging Markets segments led the charge in the period, expanding 16% and 8%, respectively (excluding currency). Revenue growth in China (up 36% operationally) and Russia (up 33% operationally) and more targeted promotional efforts were the key drivers behind emerging-market strength. Pfizer's Primary Care was the biggest drag in the quarter, with revenue falling 32%, though year-over-year performance should improve as comparisons get easier in 2013.

Looking ahead, the pharma giant reaffirmed its 2012 financial guidance, and we expect continued cost management and share buybacks to bolster the bottom line. Specifically, Pfizer expects sales to be $60 billion at the high end during the year, with adjusted diluted earnings per share coming in the range of $2.14 to $2.24. The company remains on track to complete the sale of its nutrition business to Nestle by the first half of 2013.

Pfizer also reiterated that it expects to repurchase approximately $5 billion of its common stock in 2012 - it has $2 billion left as ammunition through the remainder of the year. We think its stock repurchase program is materially value-creative on the basis of its share price being significantly lower than our estimate of the company's intrinsic value. We're also quite positive on the potential for commercialization of its Eliquis and tofacitinib therapies - click here for more information on tofacitinib. We may consider adding to our health\care exposure in our portfolio in coming weeks, with the Health Care Select SPDR ETF as the primary conduit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The XLV is included in our Best Ideas portfolio.