Is Pfizer a Good Defensive Play?

With shares of Pfizer (NYSE:PFE) trading at around $30.59, is PFE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Pfizer has to deal with some challenges, which include the loss of Lipitor exclusivity, several patent expirations in the future, and the threat of generics. A decline in revenue in 2012 was also a negative. However, unlike most companies throughout the broader market that saw a revenue decline in 2012, Pfizer has a lot of potential going forward.

Positives for Pfizer:

  • Spinning off non-core operations freed up a lot of cash
  • Cut $4.5 billion in costs last year from R&D, sales, and administration
  • Strong cash flow
  • Diverse drug basket
  • Deep pipeline
  • Many patent-protected drugs
  • Gained conditional marketing authorization from European commission for Bosulif
  • 5 new drug approvals in 2012
  • Annual EPS growth
  • Strong margins
  • Quality debt management

Let’s take a look at some comparative numbers. The chart below compares fundamentals for Pfizer, Merck & Co. Inc. (NYSE:MRK), and Novartis AG (NYSE:NVS). Pfizer has a market cap of $219.91 billion, Merck has a market cap of $140.72 billion, and Novartis has a market cap of $174.33 billion.

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PFE

MRK

NVS

Trailing   P/E

15.76

23.28

18.51

Forward   P/E

12.80

12.16

12.91

Profit   Margin

24.70%

13.05%

16.53%

ROE

11.59%

11.21%

14.23%

Operating   Cash Flow

$17.05 Billion

$10.02 Billion

 $14.19 Billion

Dividend   Yield

3.10%

3.70%

2.20%

Short   Position

0.80%

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal        

The debt-to-equity ratio for Pfizer is slightly higher than the industry average of 0.40, but it’s not a concern.

Debt-To-Equity

Cash

Long-Term Debt

PFE

0.46

$32.71 Billion

$37.49 Billion

MRK

0.37

$16.14 Billion

$20.57 Billion

NVS

0.29

$7.97 Billion

$19.73 Billion

 

T = Technicals Are Strong       

Pfizer has outperformed Merck and Novartis for every time frame listed below.

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1 Month

Year-To-Date

1 Year

3 Year

PFE

9.14%

23.00%

42.19%

105.20%

MRK

5.61%

14.84%

25.79%

48.34%

NVS

3.05%

16.43%

32.53%

50.60%

 

At $30.59, Pfizer is trading above all its averages.

50-Day   SMA

28.26

100-Day   SMA

27.06

200-Day   SMA

25.61

 

E = Earnings Have Been Strong                          

Revenue suffered a setback in 2012, but earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

48.30

49.27

65.16

65.26

58.99

Diluted   EPS ($)

1.20

1.23

1.02

1.27

1.94

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue and an improvement in earnings. However, there were improvements in revenue and earnings on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

15.66

15.40

15.06

13.98

14.55

Diluted   EPS ($)

0.18

0.24

0.43

0.43

0.84

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

Patent protection losses will affect the industry, and generics will become a tremendous threat. However, these trends won’t affect Pfizer as much as its peers. At least that’s the case for the foreseeable future.

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Conclusion

Pfizer’s deep drug pipeline winners should at least offset patent expiration losers. Pfizer is also fundamentally sound. It’s not the best defensive option throughout the broader market, but it’s far from the worst. It’s also likely to be the top performer in this group going forward.

A stock that can just hold its own in a difficult market might not make a great investment, but when there is a 3.10 percent yield, it has the potential to be a good investment.

Pfizer is an OUTPERFORM.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.