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Biotech / Medical : PFE (Pfizer) How high will it go? -- Ignore unavailable to you. Want to Upgrade?

To: Anthony Wong who wrote (2435)	5/12/1998 9:20:00 PM
From: Anthony Wong	Respond to of 9523

Excerpt from another WSJ article today, Dominant Firms' Wealth Attracts Investors -- and Antitrust Probes "Global brands that carry with them at least a modicum of pricing power now have a distinctly American flavor," says Douglas Cliggott, U.S. equity strategist at J.P. Morgan Securities Inc. in a report. "The active nourishment of these brand images, coupled with dramatic product innovation, particularly in the technology sector, have served as barriers to entry in a world that is awash in capital." What investors love about these companies is the high growth and consistency of earnings such barriers to entry bring, Mr. Cliggott says. Indeed, when he scanned 63 industry groups to find out which had the highest P/E ratios and earnings growth and lowest earnings volatility in the past 10 years, he found five, four of which were obvious franchise businesses: large-cap software (notably Microsoft), household products and cosmetics, beverages (such as Coke) and restaurants (like McDonald's Corp.). Franchise value or dominant market position can explain much of these companies' seemingly high valuations. Coke, for example, owes its 50% share of the world soft drink market not to government-granted monopoly or a costly fixed infrastructure, but to its painstakingly developed brand and distribution network. Murray Stahl, chairman of New York money manager Horizon Asset Management, notes that Coke's shareholder equity is only $7.3 billion, or a piddling $2.96 per share. But he calculates that since 1919, Coke has spent a staggering $78 billion, in current, inflation-adjusted dollars, on marketing, or $31 a share. If that marketing expense were treated as invested capital, the stock at Monday's close of $77.4375 arguably trades at only 2.3 times book value, not 27 times. "Let's say we want to start a competitor to Coke. Even if someone gave me $78 billion, I think I'd need a lot more." For anyone contemplating a challenge to Microsoft, Mr. Stahl says, "It would cost a lot more than Microsoft ever spent to develop their operating system. Then, the real barrier is, how do you convince a computer manufacturer to use a different operating system? So de facto, you have a barrier to entry. It doesn't have anything to do with money, and the only one that can really challenge it is the U.S. government." The challenge to investors is finding other near monopolies worth buying. Beth Cotner, manager of Putnam Investment Management's large-cap Investors fund, is comfortable with high valuations on pharmaceuticals giants "because they have patents. Once you have a new drug approved, like [Warner-Lambert's] Lipitor or [Pfizer's] Viagra, you have patents in place that limit the competition for a number of years, and some of these new drugs address billion dollar-plus markets. If you can establish a dominant position and have little competition, it's going to be a very profitable endeavor." Warner-Lambert Co. trades at 60 times and Pfizer Inc. at 63 times trailing earnings.