Pfocus on Pfizer
For shareholders of Pfizer, Inc. (PFE) stock, it has been a pretty barren decade. Like many large pharmaceutical stocks, Pfizer shares have done virtually nothing in years. Admittedly, the stock pays a generous dividend (6.5%+) which appears fairly secure. However, at some point, Pfizer is going to have to achieve some noteworthy success on the new product front or patent expirations on blockbuster drugs are going to continue to dampen earnings and may even force a dividend reduction. Further weighing on the stock is the fact that pharmaceuticals face political risk that appears to be intensifying. Should Democrats win control of both the White House and Congress in November, there is a pretty good chance that the legislative environment faced by drug makers will be even more adverse.
PFE shares have lost over half their value since peaking in 1999. There has been a management shakeup, staff reductions, restructuring and plant closings. Nothing has seemed to levitate the stock out of its multi-year funk. Of course, other pharmaceutical stocks have also turned in lousy decades (Bristol-Myers (BMY) and Schering-Plough (SGP) come to mind). However, Pfizer’s run of disappointment is particularly noteworthy. Looking forward, many of Pfizer’s biggest revenue generators are losing their patent protection and will face generic competition. Pfizer’s cholesterol-fighting blockbuster Lipitor is already seeing sales declines as doctors prescribe less expensive generic alternatives yet it does not lose its patent protection until 2011. PFE drugs which recently lost patent protection (Norvasc, Zyrtec and Camptosar) all saw sales declines of from 16 – 75%. With half of U.S. drugs coming off patent protection by 2011, the risk to the earnings of major pharmaceutical manufacturers is huge.
Pfizer does have a reasonably attractive pipeline of drugs in development—particularly in the oncology area. However, political risk and the possibility of a nationalized health care system could completely obviate any future earnings benefits generated by this new product pipeline. Pfizer continues to retrench and reorganize in an attempt to streamline operations. The company is on track to close thirteen manufacturing plants by next year as part of this effort.
Pfizer’s attractive dividend yield (thrice the average money market fund payout) has long been a source of solace for its investors. However, years of stagnant earnings could eventually put the dividend at risk. According to Value Line, much of Pfizer’s cash horde is located offshore and the company would take a big tax hit were it to need to bring those funds state-side in order to ensure the dividend payout.
Management is clearly under pressure to levitate the stock. The research and development budget has been expanded in a re-doubled effort to grow internally. However, absent a blockbuster success, pressure remains to grow via acquisition, which could further limit the stock’s upside in the years ahead.
Based on Ockham’s value-oriented approach, PFE shares remain attractive (and have been for some time). The stock’s price-to-sales range over the last decade is 3.91x – 5.67x, while the stock currently trades at 2.78x. The price-to-cash flow range is 14.73x – 21.42x with the stock trading at 6.29x. This whopping 66% discount to the average price-to-cash flow number over the past decade is exceptionally compelling.
Pfizer competes in a heavily regulated and difficult business. Pharmaceutical companies face political and litigation risks that in many ways rivals that of tobacco manufacturers. However, no one can argue that the societal contributions of these companies are not significant. Successful development of life-saving drugs has played a major role in Americans living longer, healthier lives.
No investor can look at Pfizer’s ten year chart and miss the fact that the stock has been a multi-year dog. However, from a valuation standpoint, these high-yielding shares are worthy of consideration for patient, income-oriented investors.
Ockham Research Staff @ August 27, 2008
