Pfizer: Pharma Favorite

11/07/2014 7:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Since being founded as a pharmaceutical maker by two cousins more than 160 years ago, this featured recommendation has grown to become one of the world’s largest drug manufacturers, with nearly $50 billion in annual revenue, explains Ian Wyatt, editor of High Yield Wealth.

Pfizer (PFE) has a drug portfolio that is simply unmatched in terms of breadth and depth of offerings in the global drug market.

We like Pfizer's outlook, but not everyone shares our enthusiasm. Pfizer shares have been flat for most of 2014. Investors have been too focused on the negative: namely, the recent loss of patent protection on popular drugs Lipitor and Viagra.

Its pipeline consists of some 81 compounds, including 59 new molecular entities, 18 supplemental indications (extensions of approved drugs), and four biosimilars (extensions of off-patent established drugs).

We think investors are too focused on Pfizer's negatives and they're short-changing the many positives.

The fact that Pfizer's drug portfolio is a money-making machine tops the list of many positives. This is a business that operates with 80% gross margins and 30% operating margins.

Since 2004, the cash account has swelled to $34 billion from $19 billion. Year after year, cash pours in, even as billions of dollars flow out annually to shareholders through share buybacks and dividends. 

The potential mega-hits that reside in Pfizer's extensive R&D pipeline are also positives.

Sales of Xalkori, a new drug used to treat advanced lung cancer, increased 134% to $282 million this year. Trumenba, a vaccine for meningitis, which recently received FDA approval, has the potential to generate billions in annual new revenue. 

But while we wait for tomorrow's new blockbuster drug, we like what management is doing today to enhance shareholder value.

The board recently authorized an $11-billion share buyback. And the dividend, which yields 3.6%, has been increased at an average rate of 9.6% since 2010.

And, finally, there is the enticing value proposition. Trading at just 13.3 times 2014 EPS estimate of $2.25, Pfizer's valuation is among the lowest in the pharmaceutical sector and near Pfizer's historical low.

Our 12-month target price is $37 a share. When the dividend is coupled with expected share-price appreciation, investors are looking at a potential 26% total return from a cash-gushing, blue-chip stock. 

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