Betting on Pfizer's Rich Pipeline and Cadence's Cheap Shares
STOCK EXCHANGE: JAMES PELTZ and MICHAEL HILTZIK
Tuesday, May 18, 1999
Pfizer (PFE)
* * *
Jim: Buy
Mike: Buy
* * *
Jim: Now, Mike, our first stock today is Pfizer,
and I want to make it clear from the outset that I
don't want any crude jokes about this company
just because it's the maker of Viagra. You know,
remarks like, "It's best to be long Pfizer these
days." This is a family paper, of course.
Mike: Fair enough. But what I would say about
Pfizer is that it's one of those companies whose
products always sound like the names of
characters from "Lord of the Rings." Who are
"Zoloft" and "Zithromax"--they're the giants who
attack the Hobbits in the woods, right? No, they
are, respectively, an antidepressant medicine and
an antibiotic.
Jim: Why do they come up with such
esoteric-sounding names? Although the important
thing is that many of these odd-sounding drugs are
leaders in the pharmaceutical market. Pfizer has
two other new drugs that are big hits--Lipitor for lowering cholesterol
and Celebrex, which Pfizer is co-marketing with Monsanto as an
arthritis treatment. It's being talked up as maybe the most successful new
drug in history.
Mike: In fact, Pfizer's had a string of great successes, which is why
this company trades at a price-to-earnings multiple that represents a rich
premium over the P/E of the Standard & Poor's 500.
Jim: The simple fact is that Pfizer is the quintessential blue chip in a
very strong business. This stock has jumped eight times over in the last
five years, compared with a 230% gain in the S&P 500. It now trades
for about $114 a share, or about 46 times earnings, and its 3-for-1 split
due June 30 is likely to give it another kick.
Mike: And the question we always end up asking about stocks like
this is: Has it gotten ahead of itself?
Jim: Not to me. I think regardless of the rich price, this is a fine
addition to any portfolio and I would heartily recommend the stock for a
lot of reasons.
Mike: One being its new drugs just now hitting the market . . .
Jim: . . . and then there's the pipeline full of other drugs in the late
stages of clinical testing.
Mike: Right, and I think in that last comment you really put your
finger on the essence of this stock. As much as our editors would like us
to disagree more, unfortunately for them, I have to agree with you on
this stock.
Jim: I think you'd be crazy not to.
Mike: Well, sometimes that happens. But the pipeline is what makes
this stock inviting for the future. Pharmaceutical companies run in and
out of favor all the time. The reason is that every one of them on
occasion will hit the drugstore lottery, coming up with a product that fills
a crying need and is a year or so ahead of the competitive pack.
Jim: And then the thrill is gone.
Mike: Unfortunately, by the time a lot of these drugs get to the
market, the government drug approval regimen has taken so long that
only a few years remain before their patents expire, at which point you
get 14 other forms of the same drug or cheap generics to cut into the
original manufacturer's swag.
Jim: So these companies are always on a treadmill. But what makes
Pfizer stand out is that it's got more promising medicines in the pipeline.
That's not all. It's a very low-debt company, which is remarkable when
you consider it spent over $2 billion a year on research and
development to come up with new drugs. And Pfizer is an excellent play
on the so-called graying of America.
Mike: The aging of the baby boomers.
Jim: Right. And finally, Pfizer is a favorite with medical and doctor
groups because of its powerful marketing capability--it's got what is
widely thought to be the strongest sales force. That's why Monsanto and
others are happy to let Pfizer help them sell products in joint ventures.
* * *
Cadence Design (CDN)
* * *
Jim: Buy
Mike: Buy
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Mike: Jim, our next stock is Cadence Design Systems, which I
regard as an outfit that poses the question: How many PhDs does it take
to screw up a company?
Jim: Yeah, this is a Silicon Valley company that has fallen from its
once-lofty orbit.
Mike: Perhaps the problem is too many Stanford high-tech graduates
and not enough Stanford business-school graduates.
Jim: But first how about explaining what they do, if you can?
Cadence may be the biggest company in its business, but it's not a
household name by any means.
Mike: Sure. Cadence's business is the development of automated
systems for the design of integrated circuits--"chips." Why do you need
a whole industry devoted to helping another industry design its
products? It's because as silicon chips get more complex and powerful,
they get to the point where the tiny transistors etched onto the silicon are
cheaper and less important to the chip's functioning than the microscopic
wires connecting them together. To make the most economical and
fastest chips possible, you need to design them so those connections are
as short as possible--and finding the right design requires sophisticated
software, which Cadence and its rivals provide.
Jim: Well done, partner. And that's why many big chip makers are
customers.
Mike: Right. But while helping the chip industry organize its designs,
Cadence has fallen into disarray. Upper management has been in
absolute turmoil. There have been three CEOs in the last couple of
years.
Jim: The latest one just quit and has been replaced by the chief
financial officer. And just so our readers know this isn't some dinky little
Nasdaq stock that we plucked out of nowhere, this is in fact a
billion-dollar company with 4,000 employees. But this stock got
hammered recently after the company shocked everyone by forecasting
that both its revenue and earnings would be flat for the rest of the year.
Mike: Now, it's not unknown in high-tech or anywhere else for a
company to tell investors, "Guess what, our results are going to be a lot
worse than you thought." But what bugged Wall Street is that Cadence
has basically blamed its ills on industrywide problems--which, oddly,
don't seem to be affecting its competitors much. So, goodbye credibility.
The harvest has been a free fall in Cadence's stock.
Jim: Early this year this stock traded in the low $30s. It now trades
around $11 or $12. That's just 10 times Cadence's expected earnings
for this year, and this is a company that's been accustomed to a P/E of
more than 25 for several years running.
Mike: Care to name some of Cadence's missteps?
Jim: One is that the company was focusing on the service industry
and apparently selling as many servicing contracts as it could without
regard to the profit margins each was generating simply in order to build
market share. The new CEO says he's going to focus on just those
contracts that are profitable, but that means its service revenue will
droop. That didn't go over very well on Wall Street.
Mike: So the question now is whether Cadence will continue going
down the slippery slope? Or is it time to buy?
Jim: This might surprise you, but I'd say buy it.
Mike: Rats! I thought we were going to have a split vote on this one.
But you agree with me that this stock has fallen so far it looks like the
only way is up?
Jim: Let me put it this way: Cadence is a real speculative buy. My
inclination was to pass on this stock for at least a few quarters while it
gets its act together. But I see this outfit as a sitting duck for a takeover.
It's in disarray. The stock is selling for dirt. Yet it's the leader in its
industry, and it's got products that, assuming the chip business is having
an up cycle, will definitely be in demand. So I'd take a flier on Cadence
being takeover bait.
Mike: Right. I would also point out that, at the moment, this stock is
absolutely vilified by professional investors and securities analysts. We
know that when they're all heading in one direction, the smart investor
strikes off the other way.
* * *
Write or e-mail with a stock you would like to see discussed in this
column. Times staff writer James Peltz (james.peltz@latimes.com)
covers the markets and corporate financial trends. Times staff writer
Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and
entertainment and is the author of the new book "Dealers of Lightning:
Xerox PARC and the Dawn of the Computer Age." Either can also be
reached at Business Section, Times Mirror Square, Los Angeles, CA
90053.
* * *
Pfizer
Monday: $114.63
Cadence Design
Monday: $11.31
- - -
Stock Exchange Lets Readers Listen in as Staff Writers James Peltz and
Michael Hiltzik Debate the Merits of Individual Stocks
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