Pfizer: "Unmatched Firepower"

04/09/2004 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

With the reshuffling of the Dow, Charles Carlson, editor of the DRIP Investor, says, " Of the three new members, my favorite is Pfizer. To be sure, healthcare stocks have not exactly been big performers over the last 18 months. Still, I see plenty of value." Here's his review.

"Pfizer (PFE NYSE) underperformed the market in 2003, and investor interest in the stock remains, to be nice, subdued. True, drug stocks face a number of headwinds, from an unfavorable political climate and patent expirations to generic competition and limited blockbuster drugs in the industry pipeline. Nevertheless, when you look at the long-term demand for drugs in this country, you have to believe that the top drug producers will continue to see their revenue and profits expand.

"Pfizer currently trades for less than 17 times the company's expected earnings for 2004 of $2.10 per share. That is a discount to the overall market and a fairly modest valuation considering the company's earnings should show double-digit growth over the next five years. Pfizer was a $50 stock in 1999, a $49 stock in 2000, a $46 stock in 2001, and a $42 stock in 2002. Investors will eventually return to the quality drug stocks- the question is when. I believe that return will occur this year, especially in the second half of this year as the rotation to quality, industry-leading stocks accelerates. Investors who want a quality drug stock with a user-friendly dividend reinvestment plan should consider Pfizer.

"Pfizer is the premier player in the drug sector. Brand names include Zoloft (antidepressant), Lipitor (cholesterol), Zyrtec (antihistamine), Celebrex (rheumatoid arthritis), and Viagra (impotence). Of course, the key to a successful drug company is its ability to generate a steady stream of products. And that requires big research and development spending. Pfizer spends more than $7 billion per year on R&D spending. Such hefty spending is one reason the company's medicines library includes approximately two million compounds. In addition, Pfizer's product pipeline holds more than 160 projects in development and over 300 projects in discovery research in 18 therapeutic areas. This R&D scope is unmatched in the industry.

"Also unmatched in the industry is the company's financial firepower. Impressive cash flow, coupled with its growing bottom line, has afforded Pfizer the ability to make important acquisitions in the sector. The strong finances have also allowed the company to raise its dividend on a regular basis. Indeed, the dividend has more than doubled since 1999. Pfizer's current yield is 2%, a nice kicker to the stock's appreciation potential. Given the stock's already modest valuation, downside risk appears limited to the low $30s. On the one hand, I'm not expecting Pfizer to show big gains over the next quarter or so. On the other hand, as Wall Street recognizes the total-return potential of these shares, I would not be surprised to see the stock return to the $40s over the next 12-24 months. DRIP investors should note that Pfizer's DRIP permits initial purchases directly with a minimum $500. There is no enrollment fee, and Pfizer's plan has no purchase fees."

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