Pharmaceutical stock Pfizer Inc. (NYSE: PFE) is one of two undisputed bellwethers in the drug space. Along with rival and fellow Dow Jones Industrial Average component Merck & Co. (NYSE: MRK), Pfizer’s fortunes set the pace for much of the health care sector. Since the beginning of the year, Pfizer shares have been under the weather. The stock is down about -18% year to date, and many are wondering if there is more pain to come for this big pharma stalwart.
And though some think the chances of the stock making a strong comeback are slim, the following five reasons make the case that now is the time to buy Pfizer stock.
Healthy Pfizer Earnings. On May 4, Pfizer reported very strong earnings that included a huge spike in first-quarter revenue. The company earned 60 cents per share, easily besting the 53 cents per share consensus forecast. Revenue jumped 54.1% year-over-year to $16.75 billion, again well above consensus forecasts of $16.58 billion. Pfizer also confirmed its prior guidance for fiscal 2010, saying both top and bottom line will be in-line with consensus estimates. It’s next earnings report is August 3.
Wyeth-Pfizer Merger. Part of the reason for the jump in quarterly revenue was Pfizer’s acquisition of Wyeth, which was finalized in October 2009. Charges related to the acquisition actually weighed down Pfizer’s net income, but in terms of revenue the company said Wyeth’s drugs—such as the antidepressant Effexor and the children’s vaccine Prevnar—contributed mightily to its stellar top line number. Once the acquisition costs are fully absorbed, the Wyeth deal should prove to be a fantastic decision for Pfizer’s bottom line.
PFE Dividends and Stock Repurchases. In the earnings conference call, Pfizer executives addressed two issues irking shareholders. One was dividends, and the other was stock repurchases. Pfizer cut its dividend in half last year to help pay for the Wyeth deal, and that roiled many shareholders. And though Pfizer has raised its dividend since last year’s cut, the company said it has plans to raise that dividend again. According to CEO Jeff Kindler, “We fully intend to increase the dividend annually, barring unforeseen events.” Kindler also said that the company plans to increase shareholder value in multiple ways, including “opportunistic” repurchases of Pfizer shares.
Pfizer Rollng with Changes. One major fear keeping investors away from Pfizer is the threat of reduced revenue from the recently passed health care reform legislation. Pfizer admitted that the health care overhaul actually reduced revenue in the first quarter by some $56 million. The company expects the new health care legislation to reduce revenue by about $300 million for the whole of 2010, by about $900 million in 2011 and by approximately $800 million in 2012. Pfizer was forced to reduce its 2012 revenue forecast by about $800 million, yet it kept its previous earnings-per-share forecast unchanged. The anticipation of steady profits on lower revenue is important, especially in 2012, as that’s when the company’s top-selling drug Lipitor is expected to start facing generic competition. It also shows that Pfizer is extremely adept at rolling with both legislative changes and losses due to patent changes.
Buy PFE Stock at the Bottom. As any investor can tell from Pfizer’s rough go of it so far this year, the stock has been lagging the market dramatically. That means it may be a buying opportunity. The stock broke below both the 50- and 200-day moving averages in May, and ever since sellers have dominated PFE trading. But in early July the stock bounced back off its lows, and that’s brought the bargain hunters out of the woodwork. Though PFE has a long way to go before getting back to its January highs, smart investors who get in on the stock now could be rewarded with some very healthy profits in the months to come.
As of this writing, Jim Woods did not own a position in any of the stocks named here.
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