Recently I was reading one of my favorite value investing blogs, Barel Karsan, when I noticed he had a piece on Pfizer. He noticed that Pfizer had a very large number of new drugs that were close to coming to market and had a quote from the CEO touting his excitement about the pipeline. With Pfizer’s huge acquisition of Wyeth during 2009, is this the time to buy the beaten up drug company?
Why Is It Cheap?
There’s all sorts of things that have pulled Pfizer’s stock price down. They took on a huge debt load and cut the dividend when they acquired Wyeth. Their best selling drug, Lipitor, came off patent protection last year. The passing of the health care bill also created uncertainty about Pfizer’s pricing power. It hasn’t been a nice couple of years for Pfizer.
As mentioned, the health care bill creates a huge question mark for this whole industry, which is why the entire sector has sold off recently. One positive note is that Americans aren’t getting less sick, so demand isn’t likely to dampen anytime soon for prescription drugs in general. I’d rank the short term outlook not so good but the long term outlook solid.
Here’s where the bad news comes back. The stock has a current yield of 4.35%, paying out 18 cents a quarter or 72 cents per year. While this isn’t a bad yield, it pales in comparison to the mouth watering $1.28 the company paid out before the Wyeth acquisition.
The company has a book value of $11.15 per share, however much of that is made up of goodwill and intangibles. Compared to other pharmaceutical companies, Pfizer trades at a discount. Their price/book is 1.48 times, while the average pharmaceutical stock trades at over 2.6 times book value.
Here’s where it gets scary. To finance the Wyeth purchase, Pfizer took on a lot of debt. A lot. They went from just a hair less than 8 billion owning to over 43 billion.
*Note: These earnings exclude any extraordinary items, something Pfizer seems to have every year.
Earnings are pretty flat. Because of the Wyeth acquisition, analysts are expecting earnings of $2.20 for 2010, meaning the company is trading at less than 8(!) times next year’s earnings.
The stock price is been in a downward spiral for most of the past 10 years. During the early part of this decade the stock price spend considerable time above $30. The downside risk seems small, as the stock trades for such a cheap valuation. A target price in the low 30s wouldn’t be an unreasonable target for a long term investor.
Guys, I kinda like Pfizer at these levels. Basically the only negative thing about the company at this point is the large level of debt. A look at the annual report confirms what Barel Karsan said about the pipeline looking good. The acquisition of the more consumer based line of products from Wyeth is a nice fit, giving very predictable sales numbers. If they can manage the acquisition smoothly, there’s even potential for the dividend to go up. For a long term investor, a double is a very realistic goal.
Disclosure: I do not own shares in Pfizer at the time of this writing, however I will mention it on my twitter if I do end up buying some.