Pfizer's Palace Still standing after all these smears
by Jeff Fischer (TMFJeff)
ALEXANDRIA, VA (June 15, 1999) -- Since our
decision to buy Johnson & Johnson (NYSE: JNJ) on
October 8, 1997, the stock has gained 54.7% including
reinvested dividends. Over the same period, Pfizer
(NYSE: PFE) gained 53.5%. (Both returns are
measured from 10/10/97 to 6/11/99.)
The returns when dollar-cost-averaging are
significantly different, however, and push the results
firmly in Johnson & Johnson's favour (to be British
about it). J&J's stock steadily rose from $60 in October
of 1997 -- sloooowly, steeeeadily -- to hit $103 just last
month before declining to the $90s again. Pfizer, on the
other hand, rose rapidly on the promise of Viagra. Its
October 10, 1997, price of $64.50 nearly doubled to
$118 by April of 1998. The stock toiled most of 1998
well above $100 (typically in the 100 and teens), and
then it rose to $150 by April this year. Ah, but April
was "the good old days, chaps." From the April
Mountain High, Pfizer has fallen back to $97.
This means that drip investors (including Drip Port)
would have bought Pfizer repeatedly last year at above
$100 (we were buying J&J instead -- mainly in the
$70s) and would now be sitting on an investment
residing under a thin film of water. That's not a horrible
concern for a long-term, regular investor in a company
as strong as Pfizer, but being underwater (or close to it)
after 20 months is less than ideal.
We choose J&J over Pfizer due to J&J's diverse
business (it is the most diversified healthcare leader in
the world), and due to its valuation compared to Pfizer
at the time. Although valuation isn't as important for
dollar-cost-average investors, it still is important.
Essentially, what you pay for a company will determine
the total return you achieve with its stock, all other
things being equal.
We put Pfizer in the back of our heads for further
study as we bought J&J, and there it remained. We
said that we'd come back to it and we have
periodically. Now is again a good time to consider Pfizer.
Pfizer is one of the most respected pharmaceutical companies in the world
and management is skillfully pursuing the coveted Number One slot
concerning pharmaceutical research and sales. The company hasn't taken any
tactical mis-steps in the past year, but the stock is now at the same price that
it traded at in March of 1998. Since then, five quarters of double-digit earnings
growth have been accomplished, stock has been repurchased, the dividend has
been raised -- all that, but the stock price is the same. The valuation has
contracted, of course, from a P/E of above 50 to a trailing P/E of 36 today.
The stock's decline was precipitated by several factors. First, the valuation
was aggressive and it represented the best case scenario. The "best case"
began to unravel like a cheap imitation purse (the likes of which you can buy
on the streets of Florence) as Viagra sales fell below expectations and even
suffered a quarterly sales decline rather than growth. First quarter '99 sales
of the most hyped and talked about drug in history (following illegal drugs)
declined from $236 million to $193 million. Of course, the first quarter may be
slow every year because the drug could prove seasonal. With spring, sales
might increase.
(Joking.)
The second marble slab to fall from the Pfizer Palace was Trovan. This
antibiotic is so effective at killing that it's damaging liver tissue. The FDA
moved to restrict use of the drug to life-threatening instances following reports
that 140 patients suffered liver damage from Trovan. Sales of Trovan reached
$160 million last year and were expected to top $300 million this year and
could have conceivably totaled $1 billion in sales in four years. Those
projections have been slashed like dead corn, however, following the U.S.
decision to curtail sales -- a decision that is actively being adopted overseas,
too. Although Trovan represented under 2% of Pfizer's 1998 sales, it stood for
about 3% of the next two year's earnings per share estimates.
One or two drugs won't make or break Pfizer, however, and doctors are
posting on the Pfizer message board right now that the company has the
strongest drug pipeline of any pharmaceutical in the whole cotton pickin'
world, something that we agreed with almost two years ago -- as did all of the
civilized peoples. (Generally speaking, that is.)
Pfizer has recently been diagnosed Foolishly at the Motley Fool. Louis
Corrigan wrote about the Trovan Massacre last week, and Matt Richey
outlined Pfizer's fundamentals and focus in a Rule Maker column, as well as
highlighting the intelligence in the Fool's Pfizer folder two weeks later.
So, Pfizer is a worldclass company, but does it sport a world-size valuation,
too? After five quarters of earnings growth and zero stock price appreciation,
perhaps not. (I don't know yet.) Tomorrow we'll look closely at Pfizer's
valuation. The company has fairly predictable sales growth and with that
predictable cash flow, greatly aiding us in a long-term projection. Let's talk
cash, baby.
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