Prescribing a Turnaround For Pfizer

03/13/2007 12:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of The Turnaround Letter, says Pfizer trades at a low multiple, generates lots of cash, is buying back stock and is raising dividends. It should rebound nicely when Big Pharma comes back into favor.

Pfizer (PFE) is the largest major drug company in the United States. [It] cemented its position as the leader with the $90-billion acquisition of Warner Lambert in 2000, followed by the $60 billion purchase of Pharmacia in 2003. But then the good times came to an end. As new drug pipelines dried up, many of the major pharmaceutical companies faltered, and Pfizer was among the hardest hit.

When Pfizer's stock peaked at 50 in 1999, it was trading at more than 70 times the previous year's earnings. Today the stock is in the mid-20s, about nine times 2006 reported earnings.

Pfizer is a classic good news/bad news stock. Among the good news: the company has $48 billion in revenues and several of the top selling drugs in the world, including Lipitor, Zoloft, Viagra, Norvasc, Zithromax and Celebrex.

The bad news: Drugs accounting for more than half of Pfizer's revenues will lose their patent protection over the next five years. Pfizer is stepping up its research effort and cutting costs throughout the organization so that it can maintain profitability even if revenues slip. [Yet] Pfizer's new-product pipeline does not contain any obvious blockbuster new drugs.

Pfizer has received a lot of unfavorable press for the huge severance compensation paid to its recently ousted chief executive officer, Hank McKinnell. [But]  the company has new leadership. The new CEO, Jeffrey B. Kindler, is a lawyer who is reputed to have good management skills. Normally we are skeptical of lawyers as CEOs, but in the highly regulated pharmaceutical industry, a legal background can be a plus.

The financial picture is almost all good news. The company is a cash-generating machine, with $16 billion of cash flow expected for 2006 and another $13 billion in 2007. At the end of the third quarter, the company had $12.8 billion in cash and relatively little debt.

The recent sale of its consumer health care segment is expected to net an additional $13.5 billion after taxes. This gives the company plenty of resources to fund R&D, make acquisitions and even buy back stock. In fact, Pfizer has repurchased more than $35 billion of its stock over the last five years (with another $10 billion scheduled for 2007) and has regularly increased (40 consecutive years) its generous dividend.

All of the major drug companies have been out of favor with Wall Street for several years. The large pharmaceutical companies will eventually come back into investors' good graces, and when that happens, Pfizer's stock will trade at a much greater P/E multiple than nine. If Pfizer can come up with a couple of successful new drugs along the way, investors will once again be falling all over themselves to buy the stock. We recommend buying Pfizer up to 33.
Disclosure Note: Employees and affiliates of the publisher own Pfizer stock

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