View Full Version : Stock of the Day- Pfizer (PFE)

06-24-2005, 10:22 AM
Pfizer (http://www.valueline.com/dow30/f7040.pdf)

Financial Strength A++
Price Stability 90
Earnings Predictability 100

Safety 1 (highest)

3-5 yr. projections: $45 - $55.

My (elementary) analysis:

This stock was grossly overpriced from 1997-2000 and has overcorrected.
Now selling at close to book value, at a PE of 13, it is a very good value.
The company has been aggressively buying it's own stock.
Although it has suffered through problems in the last couple years, it is still financially strong, has a solid ROE, and
is poised for strong price gains when any good news comes down the pipe.

Buy it up.

James Boston
06-24-2005, 11:21 AM
A couple of problems I saw at a glance:

1) They're paying nearly 60% of their EPS back as dividends. I think they could be using this money elsewhere in a more productive fashion.

2) P/E is a tad too high.

3) Pharmaceuticals make me nervous because they often rush to get drugs on the market, and we never know what the next Vioxx is going to be.

That said, their FCF growth seems really good, and I'll look at it closer at a later time.

06-24-2005, 12:16 PM
The standard argument against pharma right now is that the pipelines are empty. Does PFE have anything big coming out? Any reason to expect strong earnings growth in the next 3-5 years?

06-24-2005, 12:25 PM
I like it. You're right, the stock has been beaten up pretty good the last few years and I don't think it has fully recovered yet. In this situation, I actually like the fact that Pfizer is paying out a dividend, as it will provide a nice safety net on the downside. Nor am I concerned about their dividend policy, as their R&D budget is still the largest in the industry. Even when we adjust their R&D budget to revenue, their "Research & Development / Revenue" ratio is competitive with the rest of the pharmaceutical industry. If we believe their estimated 2006 earnings, then this stock is a good buy IMO.

06-24-2005, 12:31 PM
And I'd add that government regulation issues always pose a risk. The bruhaha over the cost of drugs has died down it seems for now though.

06-24-2005, 12:31 PM
The standard argument against pharma right now is that the pipelines are empty. Does PFE have anything big coming out? Any reason to expect strong earnings growth in the next 3-5 years?

[/ QUOTE ]

I don't know.

My knowledge of investing in stocks is very limited.
My time applied to studying stocks is, too.

Compared to experts, professionals, and such, it is miniscule.
So even if I did or did not know of potential big things about a certain company, it would long ago be priced into the stock.
So I make very little effort to try.

However, I still want to invest and to take as much of the gamble out as possible.
That points me towards financially strong companies, with a (long) history of making money, that for one reason or another have suffered something bad recently.

If Pfizer had (projected) big things in its immediate future, the price of the stock would be beyond what I'd consider a value.

If Pfizer has bad news in the near future, the price will go down a little.
If it has any good news, the price will go up a lot.

06-24-2005, 12:48 PM
The standard argument against pharma right now is that the pipelines are empty. Does PFE have anything big coming out? Any reason to expect strong earnings growth in the next 3-5 years?

[/ QUOTE ]

Pharmaceutical companies are exposued to competition from generics on drugs with expired patents. One of the games they play to get around this risk is to reformulate the drug in some way, thus creating a new drub with a fresh patent.

One of Pfizer's major drugs, Lipitor, will lose its patent in 2006 (I believe). The company has developed a new pill which blends Lipitor with torcetrapib. One risk (and opportunity) associated with PFE relates to their ability to convert Lipitor patients to the Lipitor/torcetrapib pill. PFE's pipeline valuation is heavily dependent on the success of this conversion (most non-converted patients will end up using a generic Lipitor substitute). I think the Street is looking for a 70% conversion rate by 2007, any shortfall would likely impair the stock.

Incidentally, I have had physicians try to prescribe for me combination drugs which have bells-and-whistles that the generic alternative does not have. If you are a smart patient/consumer, you will be aware of when this happens and you will decide for yourself as to wether the bells-and-whistles have benefits which are worth the added costs.

06-24-2005, 12:53 PM
I like any big pharma as a stock pick because they seem to have effective lobbyists. Thus, future legislation will tend to be beneficial to companies like PFE (at least in comparison to what the market thinks, which is all that matters).

06-24-2005, 01:59 PM

James Boston
06-24-2005, 02:02 PM
Any reason to expect strong earnings growth in the next 3-5 years?

[/ QUOTE ]

I think in PFE's case, the dividend somewhat makes up for a temporary uncertainty of future growth. Although I would rather see a little less of a dividend.

06-24-2005, 06:28 PM
Just some more data on PFE for you guys:

NOPAT margin...25.2%.......15.6.......27.4
IC Turns...........25.............22.........24
EPM .............(1.1%)........(4.2).......(1.5)

FCFY: free cash flow yield
EBV/share: economic book value per share
IC turns: invested capital turns
EPM: economic profit margin

Their 2003 numbers are a sort of blip because they had a ton of write-offs for merger related expenses, in-process R&D, and asset impairments (over $6B). Still, they look good from the quick glance I gave them. Relatively cheap, but not so-cheap-something-must-be-wrong cheap, good NOPAT margin and FCFY.

Their negative EPM is a bit worrisome, but only a little, because they look so good despite that. If they achieved an EPM of even 0, they'd probably see some good price appreciation. Essentially, they're pumping a ton of capital into their business (IC turns) - as all big pharms tend to do - but not getting an acceptable return on it. So it all comes down to what's in their pipeline, as has been mentioned.

It would be interesting to hear if anybody had some good qualitative research on what their pipeline is like and any management plans to bring EPM up, since all I have is pretty much quant stuff.

EDIT: Past performance is no guarantee of future performance, this is not intended to be serious investment advice, etc. Don't go out and put everything you own on this stock. Also, we've got PFE's beta at .85, for the poster that asked in the other thread.

06-24-2005, 07:03 PM
They generate a lot of cash - about $13.7 billion of free cash flow (cash flows from operating activities less capital expenditures) in 2004, and another $2.7 billion in the first quarter this year. Of that, they are paying out a little over a third in dividends - the current dividend yield is about 2.6% which definitely helps.

The Lipitor patent goes until 2010 - this drug is seeing huge growth unlikely to change anytime soon. However, there are either FDA issues (Celebrex) or patent expiration issues in the next three years (Norvasc, Zoloft and Neurontin) on their next four largest drugs. That said, I wouldn't be too worried. They spent $7.7 billion on R&D last year and will probably be around there this year as well.

They have announced cost-cutting measures and intentions to repurchase shares. They are not saddled with debt. While they are in a business that is potentially subject to expensive litigation, unless things went haywire on several of their drug offerings, they'll be fine. Frankly, even a few billion in litigation costs on one of their current or future drugs wouldn't be a deal-breaker for me.

If you are buying for the long-term (10+ years), I think it is a great buy - especially if you participate in the dividend reinvestment program through Equiserve (www.equiserve.com). With a minimum initial purchase of $500 (and optional monthly purchases of $50+ per month), you can buy the stock and have your dividends reinvested for free. It's worth checking out.

Good luck.

James Boston
06-24-2005, 07:57 PM
I just ran my spreadsheet for valuating the value of all future FCF. I only input the past 6 years when I do that, and generally apply it to companies that have steady performance. PFE's net income grew by nearly 300% from '03 to '04, and that's not going to happen repeatedly so it threw my numbers WAY OFF. My FCF growth rate for the past 5 years came out to 58%. At 15% FCF growth, the discounted present value of future FCF should put the company at being worth roughly 450 billion dollars, its market cap is 212 billion. I could be off somewhere though.

06-24-2005, 10:40 PM
I ran a FCF analysis assuming increases of 10% to cash flows from operations and slight increases in capital expenditures, and came up with a $228.9b valuation assuming a 10% discount rate. That is roughly $30.80 per share or about 8% over the current price.

Like I said before, I think its a good buy if you are going to compound dividends for 10+ years, but I wouldn't look for a 25% return anytime soon unless they bring something new to the market or do something else big.

06-24-2005, 10:41 PM
at a PE of 13

[/ QUOTE ]

P/E is more like 23.

Isn't the Viagra problem going to hurt them?

James Boston
06-24-2005, 10:57 PM
assuming a 10% discount rate

[/ QUOTE ]

I used 8%

and slight increases in capital expenditures

[/ QUOTE ]

I don't use this. I just take 6 years of FCF, get the FCF growth rate from those 6 years, and go from there.

I find your model interesting. Maybe I should be using a 10% discount factor. The 30-year T-bill has historically yielded approx. 8%, but a safe 10% return isn't an unreasonable assumption.

06-24-2005, 11:26 PM
Either way, you probably get to a similar result. I used 10% because that is what I feel I can reasonably get with a boring S&P index fund over the long run, and I would want a stock that would significantly outperform that.

We'll see! Good luck.

Josh W
06-25-2005, 02:32 AM
I just glanced through this thread, and I don't know a lot, but I'm surprised nobody said anything about Nektar.

Nektar Theraputics (NKTR) is working on an inhalable insulin device. This is currently being tested in Europe, and a ruling is expected to come down from the EU "soon". Pfizer, I think, is developing the administering device for this medicine.

Like I said, I don't know much, but a coworker of mine is huge on NKTR, and I know they have a close relationship with PFE. NKTR is somewhere aroung $18/share, and my coworker thinks that if a favorable ruling comes from the EU, it could skyrocket (obviously a gamble).

I would think that PFE would also be tied to the impending ruling from the EU....does anybody have any more specific info on this?


James Boston
06-25-2005, 02:43 AM
I'm going to take it upon myself to close this thread, but others can still elaborate if they wish. PFE=good investment if you're in it for the long haul. Anyone disagree?