Pfizer (NYSE:PFE), the largest drug company in the world, has seen its share price appreciate 45.6% year over year and 21.49% year to date. The current dividend yield is 3.45% and the 5 year dividend average is a healthy 4.97%. Thompson/First Call data indicates there are 17 analyst firms with a BUY or STRONG BUY rating on Pfizer shares.
So what do you think? Given gloomy economic conditions and the relative safety of big pharma, is Pfizer a BUY, a WAIT and SEE, or a STAY AWAY for the average investor like you and me?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
On the morning of October 8, market participants saw the catalytic power of positive drug results as Pfizer’s rival Eli Lilly (NYSE:LLY) hit a four year high on positive news about its Alzheimer’s drug undergoing clinical trials. As you will see below, Pfizer has the same potential for catalysts for the stock price.
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H = High Quality Pipeline
Pfizer has about 12 drugs at FDA registration stage and 20 drugs in phase III trials. Industry experts say the ones to watch are auto-immune system drug Tofacitinib; central nervous system drug Lyrica; and the potential multi-billion dollar market mover Eliquis for stroke prevention.
E = Equity to Debt Ratio is Close to Zero
Pfizer has a respectable debt to equity ratio of 0.48; slightly higher than rivals Novartis (NYSE:NVS) at 0.35 and Sanofi-Aventis (NYSE:SNY) at 0.29. However, Pfizer’s cash position is stronger, with $24.4 billion total cash on hand against $38.6 billion in total debt which compares favorably with Sanofi’s cash on hand at only $6.06 billion against $21.2 billion in debt, and Novartis at $6.1 billion total cash and $22.7 billion in total debt.
T = Technicals on the Stock Chart are Strong
As of October 8, the stock price is 3.99% above its 20 Day Simple Moving Average or SMA; 5.73% above the 50 Day SMA; and 14.32% above the 200 Day SMA. The share price crossed above all three averages in early July of 2012 and has remained above ever since. Howevcr, the Relative Strength Indicator, or RSI, is over 90. This signals the potential of an overbought condition and a subsequent dip in the share price.
S = Support is Provided by Institutional Investors & Company Insiders
Pfizer is 73.29% institutionally owned. The top five holders are Vanguard Group, Wellington Management, Bank of New York Mellon, Fidelity Investments, and T.Rowe Price Associates. Pfizer is a favorite for institutional buyers, with over 1600 different institutions holding PFE.
E = Earnings Are Increasing Quarter over Quarter
Pfizer’s earnings per share increased an impressive 33.52% quarter over quarter while rival Sanofi showed a 15.2% increase and Novartis showed a quarter over quarter decrease of 0.55%..
E = Excellent Relative Performance to Peers
Pfizer may be the biggest drug company in the world but on some indicators it lags behind major competitors. While its operating margin of 20.16% bests Sanofi’s 11.9% and 17.56% at Novartis, Pfizer’s Return on Equity of 10.19% is the lowest of the three. On 5 year EPS growth Pfizer lags as well, with a -6.12% against +5.57% for Novartis and +13.44% for Sanofi.
T = Trends Support the Industry in which the Company Operates
Conventional wisdom says future growth with a big pharma drug provider like Pfizer depends on the race between patent expiration of existing blockbuster drugs and the introduction of new patentable products to replace them.
Yet there are trends afoot that could well turn conventional wisdom on its ear. The first is legal challenges to existing patents. In early October 2012 the Indian government patent office revoked Pzfizer’s patent on its kidney cancer drug Sutent, which brought in $1.19 billion in revenue globally in 2011. The patent was challenged by two Indian pharma providers with business models of providing drugs at lower costs. Pfizer is appealing the case but the decision is part of a trend of successful patent challenges across the industry over the last decade. The successful challenge of Pfizer’s Lipitor patent a year or so ago made headlines in the non-business press.
These legal challenges are part of a broader and more dangerous trend for big pharma of a move towards more affordable drugs. In times past when consumers, governments, and private insurers were seemingly flush with cash, generics were seen as less effective and therefore less desirable than brand name prescription drugs. That is all gone now as generics are gaining in popularity largely because of their affordability, but also because they are seen to be effective. In short, we are all of us right now borderline broke and doing whatever we can to control costs.
Private insurers, consumers, and governments across the world are looking for ways to make drugs more affordable. With healthcare costs overall accounting for huge portions of national budgets everywhere, you can expect to see reforms and legislation all aimed at driving down costs. This of course does not bode well for the profitability of big pharm companies like Pfizer over the long term.
Due to its size, technological capability, and reputation, Pfizer is in a good position to respond to the trends. In the short term the dividend is attractive and it should be awhile for the negative headwinds to end the love affair market participants have with companies like Pfizer. Despite the bullish views of the analyst community, common sense seems to say the days of astronomical revenues from drug prices only governments and insurance companies can afford to pay are drawing to a close. This certainly goes against the crowd but it looks like PFE is a STAY AWAY for the longer term or at best a WAIT and SEE how they respond.
Watch for M&A activity for Pfizer to increase its presence in the generic drug sector. In short, watch for evidence that Pfizer, or any other big pharma stock in which you might be interested, is actively planning to manage a future of lower priced drugs.
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