A glance at the stock chart of Pfizer (PFE), the world's largest pharmaceutical company, could make you sick—if you own the stock. It is now trading at its 52-week low of $17.96 a share, down from $27 a year ago and way down from $50, where it was in 2000. After the vertigo, nausea, and other side effects of experiencing such a precipitous plunge, you might even think about calling your broker, if you haven't already, to sell the stock.
Bad move. That would be financially unhealthy. Selling when a stock is trudging lower is a reckless idea. That is precisely the time to buy, and in the case of Pfizer, it's definitely bargain-hunting time for long-term investors.
The bad news dogging Pfizer is that it hasn't had any good news for some time. But even so, and despite the many naysayers, the stock is undervalued. On both technical and fundamental grounds, there are reasons for long-term investors to be bullish. The bad news is already well reflected in the stock. But the good news isn't, and any positive development at this point would quickly set the stock on fire.
A Short History of Pfizer
Why do I say that Pfizer is undervalued? Let's look at the history of the stock: Over the past 20 years, Pfizer's price-earnings ratio hasn't been as low as it is now. The average price-earnings ratio of the stock ranged from a high of 51 in 1998 to a low of 11.5 in 2007. Today, the stock's p-e, based on estimated earnings of $2.35 a share, is a meager 7.6, and it goes down to 7 when based on 2009 estimated earnings of $2.56. That argues strongly that Pfizer is way underpriced.
Barbara Ryan of Deutsche Bank (DB), who rates Pfizer a buy, has a 12-month price target of 30. At that price, the stock's p-e would be 12.7 on estimated 2008 earnings, and only 11.7 on 2009 profit forecasts. So even at 30, the stock would be trading at historically reasonable levels.
And there is the enticing dividend yield that Pfizer provides while investors wait for the stock to recover. Its yield of 6.6% is the highest in the industry, and contrary to what the bears contend, the payout stands on solid ground. "We believe stability in the $1.28-a-share dividend is a high priority, and Pfizer will continue to adjust costs to maintain it," says Herman Saftlas of Standard & Poor's, who rates the stock a hold. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies.) Deutsche Bank's Ryan believes there is no issue to worry about as regards the company's ability to fund the dividend, given that Pfizer has a hefty $35 billion in cash and just $7.3 billion in long-term debt. In 2008, she estimates Pfizer will generate $17.3 billion in free cash flow.
The bears caution that Pfizer's earnings are dwindling, as reflected in declining sales of its cholesterol treatment Lipitor in the face of competition from generic versions. First-quarter results were, indeed, dismal compared with the Street's expectations. Revenues could well disappoint again over the short term, but the bulls aren't that concerned about earnings. They point out that over the years, Pfizer has been able to steadily increase profits, in part by managing overall costs. Pfizer has a cost-restructuring program that is expected to produce savings of up to $2 billion by the end of 2008. And the bulls are confident Pfizer will come out with new products in time to fill the shortfall that will come from the expected Lipitor sales slowdown.
Confirmed 2008 Earnings Forecast
In spite of the lackluster first-quarter results, Pfizer's management has reiterated its guidance for all of 2008, forecasting $47 billion to $49 billion in revenues. Kavita Thomas of First Global Markets, who rates Pfizer "moderate outperform," expects flat revenue growth but sees earnings growing at 7% to 8% in the next two years, based on management's aggressive cost-cutting measures and potential new drugs. Thomas' estimate is in line with Pfizer's historical growth rate.