Stock of the Day- Pfizer (PFE)

[TGoldman]

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.

[alekhine8]

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]

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.

[alekhine8]

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.

[James Boston]

[ QUOTE ]
assuming a 10% discount rate

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I used 8%

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and slight increases in capital expenditures

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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.

[alekhine8]

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.

[AceHigh]

[ QUOTE ]
at a PE of 13

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P/E is more like 23.
http://finance.yahoo.com/q?s=pfe

Isn't the Viagra problem going to hurt them?
http://www.cbsnews.com/stories/2005/...in698124.shtml

[Josh W]

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?

Josh

[James Boston]

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?