Pfizer Poised for a Rebound
A strong balance sheet is worth its weight in gold in this current environment.
Don't you know by now you've got to take life on the chin
Still you sit and wonder why the past is gone
Baby you'll go under if you don't carry on"
Don't Misunderstand Me - Rossington Collins Band
Yes folks, The Rossington Collins Band. Formed a few years after the tragic plane crash that killed members of Lynyrd Skynyrd and their crew, Rossington Collins first album, Anytime, Anyplace, Anywhere was released to the delight of many Skynrd fans in 1980. As a sophomore in high school, I remember being particularly excited that the surviving members of Skynyrd were back together again.
The lyrics of Don't Misunderstand Me were swimming around my head this morning as the turbulence of the market shows no signs of slowing down. But carry on we must and I am convinced that the carnage of today is providing many opportunities for those with the wherewithal to persevere.
Pfizer (PFE) reported its 4th quarter earnings this morning. To the surprise of many, Pfizer's EPS of $0.52 beat "The Street" consensus of $0.47 and revenues of $13.07 bln also beat the consensus number of $12.18 bln. The upside surprise seemingly came from sales of a couple of the company's blockbuster drugs. Sales of Lipitor were $3.43 bln versus consensus sales of $3.18 bln, and sales of Norvasc were $650 mln versus consensus sales of $571 mln.
However, there is sort of a good news/bad news scenario unfolding here. Pfizer went on to say that 1st quarter 2008 revenues may not compare to the 1st quarter revenues of 2007. Pfizer cited the loss of exclusivity of Zyrtec as well as Norvasc and Campostar this February. So patent expirations as well as a less than robust pipeline are clearly the bad news.
But I think the good news may outweigh the bad.
Many analysts thought sales of Lipitor would disappoint. But with sales of $3.43 bln, Lipitor easily beat consensus of $3.18 bln and builds upon 3rd quarter Lipitor sales of $3.17 bln, which also beat consensus of $3.09 bln back on October 18th.
Valuations are also compelling. With a trailing multiple of 10.50 and a forward multiple of 9.5, Pfizer is much cheaper than rivals Merck (MRK), currently trading at 20 times trailing and 15 times forward earnings and Bristol-Myers Squibb (BMY), currently trading at 21 times trailing and 13 times forward earnings.
Looking into the numbers a bit further, Pfizer is also cheaper on a price to book valuation. PFE trading at 2.5 times price/book compares nicely to Merck at 5.25 times and Bristol-Myers Squibb at 4 times. Also, due in large part from the sale of its consumer products business to Johnson & Johnson (JNJ) in December 2006, Pfizer's balance sheet is laden with cash: $21 bln or so at last look. That should mean its healthy dividend of $1.28 or 5.7% is in no danger of being cut, and an acquisition to help bolster the pipeline could be on the horizon.
Cost reductions have also started to help the bottom line as in the past year alone, Pfizer cut more than 10,000 jobs. Pfizer has also continued to expand its global footprint as now more than 50% of their sales are overseas. To start this year, Pfizer along with General Motors (GM), Caterpillar (CAT), DuPont (DD) and Citibank (C) were the five Dow Components with the worst ratings from analysts on Wall Street. Truthfully, the performance of the stock has given analysts every reason to be negative as Pfizer is currently trading dangerously close to 52 week lows, and well off the $38 levels we saw in February of 2006.
All that being said, I think Pfizer provides us with a great risk reward trade at these price levels and valuations. I still think an acquisition is somewhat imminent and management finally seems to be focused on running the business better. A strong balance sheet is worth its weight in gold in this current environment and at some point this year, Pfizer should start to reap the benefits of doing most things right.
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