What do the dates 11/3/97 and yesterday 9/14/10 have in common? Among other things, the price of Pfizer (PFE) stock was the exact same on these dates. This is pretty astonishing to think about. Pfizer is supposed to be the bluest of the blue chips in one of the safest, most consistent industries. How is it that such a stock in such an industry could literally have done nothing for 13 years?
For one thing, valuations in the late 1990’s were extraordinarily high and the whole pharmaceutical industry was trading at a steep premium to the market. This was especially true of Pfizer who at the time was a superstar and just came out with Viagra, which made the company and the stock the toast of Wall Street, as well as many bedrooms. However, the poor stock market in the 2000’s as well as the bevy of blockbuster drugs made the pharmaceutical industry a tough place to invest. This caused valuations to severely contract, but there is cause for optimism.
Cash Cow
Pfizer generates gobs of operating cash flow which hit $7.44 billion over the latest 12 months. This gives the company lots of room to pay a fat dividend and keep increasing it every year. Currently, the stock pays a 4.2% dividend yield, with future increases very likely. Compare this to the ridiculously low 2.68% on the 10 Year treasury note. Also the stock is only trading at 7.7x this year’s estimates of $2.21 per share. So you get a higher coupon payment from Pfizer plus the opportunity for substantial capital gains. Which would you rather have?
Pfizer has more than 10 drugs that have more than $1 billion in sales and its pipeline is relatively healthy as well. Its mega-blockbuster Lipitor is coming off patent soon, which is probably the main reason investors have grinded the price/earnings multiple to dust, but I think it has been overdone. Such is the problem with drug stocks that have blockbusters, but I think the 13 year spell of nothingness is more punishment than it deserves. Once the sector comes back into favor, which history tells us it will, Pfizer will certainly be one of the go-to stocks that investors will bid up. Additionally, the merger with Wyeth should continue to provide cost savings.
In a year’s time, I think the stock can hit $23 per share. That would be a strong return from current levels. It would still only be north of 10x earnings at that level, which would still be cheap historically, but let’s set that as the first target.
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