by Lawrence Meyers | October 24, 2011 9:00 am
Today, we’re looking at Dow Jones Industrial Average component Pfizer (NYSE:PFE). For many years, it was focused almost exclusively on pharmaceuticals, but like many of the big pharma companies, it determined it was necessary to buy other companies to buttress its pipeline.
Warner-Lambert was Pfizer’s biggest target, but it has swallowed other companies as well, including Immunex. Now Pfizer’s Biopharmaceuticals segment provides big drugs like Lipitor, Enbrel, Lyrica, Prevnar, Celebrex, Viagra, Effexor, Ariscept and Norvasc, among many others. Its Diversified Business segment includes animal health and consumer health care categories that offer pain management, respiratory and personal care products, as well as dietary supplements and nutritional products.
The key driving factors regarding Pfizer are research and development, the economy and competition. R&D is the real reason behind those mega-purchases over the past decade, and as you can see, the company’s list of well-known blockbuster drugs is enormous. As with competitor Merck (NYSE:MRK), the economy isn’t much of a factor for Pfizer’s lifesaving and life-improving drugs, but it does impact its consumer segment. Meanwhile, Pfizer does face competition for some drugs. AstraZeneca’s (NYSE:AZN) Crestor, for example, is the cholesterol competition for Lipitor.
You’d think all these drugs would mean big earnings for Pfizer, but such is not the case. Stock analysts looking out five years on the company see annualized earnings growth at only 3.2%. At a stock price of $19, on FY 2011 earnings of $2.25, the stock presently trades at a P/E of 8. Merck and GlaxoSmithKline (NYSE:GSK) are the closest competitors, with P/Es of 9 and 22, respectively, so Pfizer is on the low end of the valuation scale.
Pfizer’s financials look okay, but the company carries $42 billion in debt, thanks to many of its acquisitions. This is offset, however, by $26 billion in cash and a fantastic trailing 12-month cash flow of $22 billion, which is four times the amount of free cash flow necessary to pay its 4.2% dividend. Pfizer produces a ton of cash, and reinvests that cash right back into its R&D units to find the next blockbuster drug.
No insider purchases have been made in a long time, which doesn’t speak to insider faith that the company is undervalued.
Pfizer’s extraordinary free cash flow — and it is extraordinary — would give me enough reason to bump its P/E with a premium. But even if I am incredibly generous and give it a fair value of 6.5 times earnings, I have a hard time seeing Pfizer as a buy. On projected 2015 earnings of $3.10 per share (factoring in the 4.2% compounded dividend yield reinvested), we get a price target of $20.
Thus, I see Pfizer as being fully valued without much upside. You don’t want Pfizer in a regular account, and I’d even question its value in a retirement account, given that I’m being generous with the P/E as it is.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.
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