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Pfizer and Baxter: Pharma Values

06/16/2014 7:00 am EST


John Buckingham

Editor, The Prudent Speculator

We focus on a widely-diversified portfolio of value-oriented stocks; two of our latest recommendations are in the pharmaceutical field, explains John Buckingham, editor of The Prudent Speculator.

Baxter International (BAX) develops, manufactures, and markets products that focus on hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions.

Its three main operating business areas are: BioScience, Medication Delivery, and Renal (which includes a portfolio of dialysis-related products).

While the firm's biopharma and medical products businesses will split in two in 2015, competitive advantages will remain strong, supported by the fact that more than two-thirds of Baxter's revenue is generated from market-leading products.

As is the case for many healthcare firms, emerging market economies are a prime source of future growth, and hemophilia demographics point to a large unmet need in Brazil, China, and Russia.

During the last operating quarter, medical products sales increased 22%, largely driven by the firm's acquisition of Swedish dialysis product maker Gambro. BAX shares are trading at relatively attractive valuation metrics and offer investors a 2.8% dividend yield.

Pfizer (PFE) is a global pharma company. Its Biopharmaceutical segment is focused on discovering, developing, and marketing drugs for cardiovascular, metabolic, central nervous system, immunology, pain, infectious diseases, respiratory, oncology, and other indications.

The Diversified segment includes non-prescription self-medications and animal health products. Although the consumer products division isn't a huge portion of company revenue (approximately 6%), we like the diversification and cash flow the unit provides.

While many believe the longer-term tax benefits and product pipeline pickup of Pfizer's recently failed $119 billion acquisition of competitor AstraZeneca (AZN) were essential, we continue to like the pharma entity as a standalone company given its current valuation and the potential for upside from capital allocation and business development.

Backed by a solid balance sheet and strong free cash flow generation, management has sufficient financial flexibility to invest in growth and return capital to shareholders. PFE shares currently offer investors an attractive 3.5% dividend yield.

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