Valuation: Pfizer Inc. (PFE)

Company Profile:  Pfizer Inc. (PFE) (obtained via Google Finance)

Pfizer Inc. (Pfizer), incorporated on June 2, 1942, is a research-based, global pharmaceutical company. The Company discovers, develops, manufactures and markets prescription medicines for humans and animals. It operates in two business segments: Pharmaceutical and Animal Health. The Company also operates several other businesses, including the manufacture of gelatin capsules, contract manufacturing and bulk pharmaceutical chemicals. In June 2008, Pfizer completed the acquisition of all remaining outstanding shares of common stock of Encysive Pharmaceuticals, Inc. through a merger of Pfizer’s wholly owned subsidiary, Explorer Acquisition Corp., with and into Encysive.

 Business and Management Review 

1) Is the business simple and understandable?

Pfizer is the world’s largest pharmaceutical firm, with annual sales near $50 billion. After the sale of its consumer health-care division to J&J, prescription drugs now account for more than 90% of sales. Top sellers include cholesterol-lowering Lipitor, Celebrex for arthritis, Viagra for impotence, and Lyrica for epilepsy and some types of neuropathic pain. Recently approved drugs with blockbuster potential include oncology drug Sutent and Chantix for smoking cessation. As most pharmaceutical companies’ in the market, this type of business it is not simple since there is a lot of research and the development of new drugs in regular basis. However, the understandability of this business may vary on the investor’s background.

2) Does the business have a consistent operating history?

This stock is in the drugs industry, which has been a poor industry to be for the past 5 years. On the other hand, Pfizer five-year returns have been about average compared to the industry. Keep in mind when looking at a stock or industry’s record that historic returns are not necessarily a predictor of future performance. However, persistent strength or weakness may give say something about the structure of an industry or quality of a company’s management.

 3) Does the business have favorable long term prospects?

Most stocks in the drugs industry have seen steadily growing revenue and earnings over the past three years, in which Pfizer has been declining revenue growth.

In regards of stock dividend yield, Pfizer pays more dividends than most of the other companies in the industry. Therefore, since this company pays higher dividend yields and has grown for the past five years, Pfizer could be considered in the mature stage of the business cycle (limited growth opportunity).

Moreover, this stock’s forward earnings yield of 14.29% is the annual return it would generate if its profits remained fixed and it paid out all of its earnings as dividends. This is much higher than the earnings yields of other stocks in its industry; hence it is extremely healthy in absolute terms. For this company to generate good returns for investors, it will probably only have to realize moderate growth in earnings or a higher valuation by the market. It is, however, important to be reasonably confident about the quality of this stock’s earnings. Sometimes a company in distress has a high yield because its stock price has dropped sharply.

Most companies in the drugs industry have generated very high returns on assets over the past five years. Over the long haul, this company has posted results that are about average for its industry, though its ROA over the most recent 12 months was very high. Note also that the company has had very strong profit margins, another key profitability measure.

 4) Is management rational?

Mr. Kindler has been with Pfizer since 2002 where he began his career as a Senior VP and General Counsel. Then in 2006 he became the Chairman and eventually the CEO of this drug company. Since the time he became a CEO the company has suffer more hits and gains and his compensation has only gone up. Therefore, it is hard to judge is the management has been rational on their actions.

5) Is management candid with its shareholders?

The company has a typical investor relation website, with information about corporate reports, investors’ news, historical stock chart, etc. We believe that this page gives investors a good summary on the stock performance in the market.

  Financial and Value Review

Defensive:

1) Size of firm

The market cap of Pfizer is $118.19 billion.  “Pass”

 2) Strong financial condition

The company’s current ratio is about 2.15, above the 2.0 requirement.  “Pass”

 3) Earnings stability

Pfizer has had a consistently positive net income for over 10 years.  “Pass”

 4) Dividend record

This company has consistently paid a dividend for over 10 years.  “Pass”

 5) Earnings growth

Earnings have grown more than 1/3 over the last 10 years.  “Pass”

 6) Price to earnings analysis

With a PE ratio (using our Methods) of 15.44, the requirement of under 20 is met.  “Pass”

 7) Price to assets analysis

The Price to Book ratio and the PB to PE tests are both met. “Pass”

 Overall

Having passed all the tests for the defensive investor following Benjamin Graham’s value investing strategy, we believe Pfizer may be suitable for the defensive investor.

  Enterprising:

1) Strong financial condition

The company’s current ratio is above 1.5 and debt to net current assets is lower than 1.1.  “Pass”

 2) Earnings stability

Pfizer has reached a positive net income for over 5 years.  “Pass”

 3) Dividend record

PFE currently pays a dividend.  “Pass”

 4) Earnings growth

Earnings are greater today than they were 5 years ago.  “Pass”

5) Price

The price is not less than 150% of the net tangible assets.  “Fail”

Overall

Since Pfizer passed 4 of the 5 enterprising tests, we find this company to be good for enterprise investors.

 Valuation:

Our valuation model finds a fair value to be around $17.28.

Opinion:

Since the company is currently trading at about $17.73, we feel it is currently a bit overvalued and may not be a suitable investment for the defensive or enterprising investor. None of the staff of ModernGraham.com held a position in Pfizer at the time of publication.  Also, please read our disclaimer and Our Methods.


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