Our View is Neutral on Pfizer Inc. (NYSE: PFE)

Pfizer Inc. (NYSE: PFE)     11/8/2012                                            Last Price: $24.16

VIEW:  NEUTRAL

Pfizer is the world’s largest pharmaceutical firm, with annual sales near $70 billion. Following the acquisition of Wyeth, prescription drugs now account for close to 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. However, recently approved generic forms of Lipitor will very likely knock off one of Pfizer’s key drugs.

Sector: Healthcare                                                           Industry: Drug Manufacturers – Major

Highlights: 

Pfizer, Inc. is a global developer and marketer of medicines and pharmaceuticals for various medical conditions in both humans and animals. Some of the company’s brand names include Lipitor, Chantix/Champix, Zoloft, Celebrex, and Viagra, among many others. The stock closed yesterday’s trading session at $24.16. In the past year, the stock has hit a 52-week low of $18.10 and 52-week high of $26.09. Technical indicators for the stock are neutral for the short term, the company has a good combination of strong free cash flow generation and manageable financial leverage, our main concern is the loss of patent exclusivity.

GROWTH AND BALANCE SHEET

Pfizer reported a significant decline in revenues -15.9% to $13.98 billion from the last year quarter. The net income of PFE fell to $3.21 billion. The total Debt/Equity of 46.90% is high but acceptable for an industry with average 88%. While Pfizer continued to perform well in animal and consumer healthcare businesses, it is committed to divest its non-core assets to focus on its core pharmaceutical business. The company is preparing to spin off and divest its animal business while the sale of nutrition business is well on track. Pfizer is planning to buyback up to $10 billion of its own stock, which is good in the sense that it redistributes cash back to the shareholders.

VALUATION

Pfizer is the world’s largest pharmaceutical firm, with annual sales near $70 billion. PFE has a PEG ratio of 6.26 above the industry average. Current PE at Pfizer stands at 19, way higher than most of its peers in the industry. The stock is currently trading below its intrinsic value of $27. The beta of 0.67 implies low volatility of the stock with respect to the S&P 500. The company has a current annual dividend yield of 3.58%. Pfizer has five new drug launches in the pipeline which are expected by 2013. By the end of 2013 over 10 blockbuster drugs are expected to lose patent exclusivity which includes Lipitor. These branded drugs are set to lose over $100 billion in revenues in the next few years and thus companies such as Pfizer will need to develop new drugs to offset these losses.

RECOMMENDATION for next 6 months: We initiate our coverage with NEUTRAL. The company has demonstrated a pattern of neutral technical signs, the dividend yield of 3.60% is attractive but future growth of revenues is a question. Shares are up 12.20% year to date as of the close of trading yesterday. Our overall score for PFE is 5.25

For trading we suggest:

• Buy the January 13  put with a strike of 22.50 priced at $0.26 per contract
• Sell the January 13  putl with a strike of 20 priced at $0.07 per contract
• Net Debit to start: $0.19
• Maximum risk: Net debit

NEWS and CALENDAR

Thursday November 8, 2012 – Pfizer expects generic competition in Canada after Viagra ruling

Wednesday November 7, 2012 – Pfizer ends deal with Chesco firm, walks away from big investment

Tuesday November 6, 2012 – Pfizer says FDA approves arthritis drug Xeljanz

PFE Strengths

• Global Market Leader
• Innovative Culture
• Brand Name
• Research and Development

PFE Weakness

• Loss of patents
• Regulated Business
• Exposure to Generic Competition
• Regulated Business

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

PFE’s intrinsic value is $27.00 the current price is $24.27, the stock trades 11% below its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. PFE’s annual EPS for the last 5 years were 1.18, 1.19, 1.21, 1.01, 1.10 this type of earnings action is not favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

PFE’s Total Debt/Equity of 46.90% is acceptable as the industry average debt/equity is 88%

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

PFE’s EPS growth for this quarter relative to the same quarter a year earlier is 36.60% well above our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

PFE annual earnings growth rate over the past five years is -6.10%, below our target growth rate.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

PFE’s 52 week high is $26.09 current price is $24.30, is only 7% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 19.02 the average industry P/E ratio is 16.15 and is also above the S&P 500 P/E ratio of 16.30

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.02% of PFE stock. Management’s representation is not large enough. This does not satisfy the minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

Pfizer stock has been showing support around $23.63 and resistance in the $24.89 range. Our indicators give a neutral view on PFE.