With another economic slump getting more likely by the day, wealth preservation rather than capital appreciation is my number one priority. That means seeking out defensive plays which will be resilient during a downturn. Enter Pfizer, the world’s largest pharmaceutical business.
This behemoth owns nine blockbuster drugs (each delivering sales of more than $1bn), has a market capitalisation of nearly $125bn and is set to achieve 2010 sales and underlying earnings per share of $67.7bn and $2.18 respectively. That puts the stock on a skinny price/ earnings ratio of less than seven and it offers a fat 4.7% yield. Why such a low valuation?
The biggest headache facing the firm is its steep ‘patent cliff’ – its $11.4bn per- year cholesterol-busting treatment, Lipitor, will be hit by a slew of copycat generics after losing protection in late 2011. As such, Wall Street is worried about the board’s ability to replace such a huge slug of income, on top of the task of integrating its recent $68bn acquisition of Wyeth.
But the sell-off has been too severe. Pfizer has poured serious bucks (14% of sales) into R&D in order to boost its pipeline. That now sports 133 compounds of which 34 are in Phase III trials. What’s more, it is diversifying away from solely prescription medicines into other products such as nutritionals, consumer products and animal health. It is also ratcheting up its presence in the rapidly expanding BRIC countries, where it is already the number three player.
Pfizer (NYSE: PFE), rated a BUY by Credit Suisse
Expenses are being slashed too, with 6,000 more redundancies announced a fortnight ago. That keeps it on track to reduce costs by a whopping $4bn-$5bn per year by 2012. The upshot is thataa even after baking in its impending patent expiries, Pfizer should still be able to achieve 2015 turnover and underlying earnings per share of $60bn and $2.3 respectively. The dividend looks secure given that the net debt ($17bn) and pension deficit ($9.4bn) in aggregate equate to a comfortable 0.9 times earnings before interest, tax, depreciation and amortisation (Ebitda).
As for other big snags, like other big pharmas, Pfizer is having to face up to tighter regulatory scrutiny, more frugal government reimbursements and a stronger dollar. President Obama’s healthcare reforms will shave off $300m in revenues this year, $900m in 2011 and $800m in 2012. Longer term, however, the net impact should be positive. That’s because from 2014, 32 million uninsured Americans will receive medical coverage and many will be able to afford drugs.
So despite Wall Street’s concerns, Pfizer is a sensible place to park money. I would value the stock on a 14 times 2015 p/e multiple. Discounted back at 10%, that generates an intrinsic worth of around $20 per share. Second-quarter results are due out in mid July, with Credit Suisse assigning a $24 price target to the stock.
Recommendation: BUY at $15.3
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments