Viagra Maker Can Cure Investment Dysfunction

Viagra maker can cure investment dysfunction...

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Ticker : PFE (Pfizer Inc) Recommendation : BUY - HOLD

Industry : Pharmaceuticals Date Of Report : Feb 28, 2005

Share Price : $26.68 Analysis By : XYZ

Highlights

* Impressive steady ROE in the range of 20 % to 35 % in last five years; higher 5 year average P/E Ratio at 26.42 as compared to Industry at 23.80 - indicates strong growth potential.

* Current Ratio of 1.54 above 1 and Long Term Debt/Capital of 10.42% (below 25%) reflects well on company's financial stability. Pfizer's double digit profit margins and operating margins continue to grow.

* The world's largest drug company, with about 11% of global market. Well diversified strong product line protected with the patents and R&D pipeline includes more than 130 new molecular entities, as well as another 95 projects representing new uses for existing medicines. The R&D spending totaled $7.7 billion in 2004, equal to 14.6% of total revenues indicates huge reinvestment.

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Pfizer's ROE has been impressively steady and it has averaged at 21.90% as compared to DJIA (20.93%) and it's industry(25.90%) since Yr. 2000 to Yr. 2005. This indicates Pfizer's stable and sustainable profitability. With 5 years average P/E ratio at 26.42, Pfizer is better performing than its industry at 5 years average P/E Ratio at 23.80. Pfizer's higher P/E ratio indicates that investors can anticipate higher growth in future. Pfizer has shown consistent growth in its profit margins and operation margins in the past and it is expected to grow. Based on previous results Pfizer's profit margin is expected to grow from last 5 years average of 24.64 5 to 32.70 in next 5 yrs and its operating margin is expected to grow from last 5yrs average of 34.35 to 42.75% in next 5 yrs. This clearly reflects Pfizer's profitability and excellent operating efficiency.

Pfizer's financial position has been remained strong over the period. The Current Ratio is 1.54. Current ratios above 1 mean that a company's short-term debts are less than its assets. The higher the Current ratio, the stronger the company's finances are. The Price/Cash Flow ratio is 13.80 lower than its Industry at 17.90. A low ratio shows a strong ability to generate cash and reflects well on a company's stock price and liquidity. The Long-Term Debt/Capital is 10.42%. This indication of financial leverage measures the extent of a firm's capital that is provided by lenders. Below 25% reflects well on a company's financial stability. The average Long Term Debt/Capital for Major drugs Industry Group is 12.42%.

Pfizer is world's largest innovative pharmaceutical firm, with annual sales of $52 billion Prescription drugs generate 87% of sales. Top sellers include Lipitor, a cholesterol-lowering statin;antidepressant Zoloft; Viagra, for impotence; Norvasc, for hypertension; and Celebrex, for arthritis. Pfizer derives about 7% of revenue from consumer health-care products like Visine eye drops and Nicorette smoking-cessation products. Their products are available in more than 150 countries. Pfizer has achieved remarkable growth by discovering and developing high-quality and high-value products that benefit millions of people all over the world. Their core business is stable and predictable. The company's broad range of drugs reduces its dependence on any single product providing strong competitive advantage. International Business, sales accounted for 44% of total revenues in 2004. Pfizer buys foreign currency options to protect itself against exchange rate risk; this is risk reduction and the payoff takes the form of smoother earnings and perhaps higher value. Pfizer invests in its R&D to ensure that it's product pipeline remains full and balanced with a mix of products at different stages in the FDA approval cycle. Pfizer invested $7.7 Million, about 14.66% of it revenues, for year 2004. For full-year 2004 revenues grew 17 percent to $52.516 billion, compared to 2003.

Valuation

A discounted present value (DPV) analysis indicates Pfizer's current stock price is potentially undervalued and Pfizer has an excellent intrinsic value. From the analysis based on the range of reasonable EPS growth rate from 8% to 12 % and constant risk adjusted discount rate of 15 %, the economic value of Pfizer ranges from $33.72 to $40.45 per share. Based on alternate assumption of constant EPS growth rate but variable risk adjusted discount rate , a range of economic value for Pfizer from $35.45 to $42.35 is calculated, based upon a range of risk adjusted discount rate from 12% to 16%. Based on range of reasonable EPS growth rate and risk-adjusted discount rate assumptions, a range from $33.72 to $42.35 is calculated for the economic value of Pfizer.

This estimated range is well above the current stock price of $26.80 indicating Pfizer's current stock is undervalued. Pfizer stock is bound to provide large future returns with low risks given its past performances. The DPV analysis clearly indicates that Pfizer is a good bargain and its future earnings prospects remain intact.

Pfizer is a great business run by capable managers. They have been serving their shareholders well for more than a century. CEO Hank McKinnell took his position in January 2001, has $2.04 million in salary with $25 Million worth of Pfizer stocks. Pfizer's executive VP with 1.5 million in salary owns about $7 million worth of stocks and company's Senior VP Dr. Corr with $80600 in salary owns about $4 million worth of Pfizer's stocks. Pfizer's executives own stocks worth of 6 to 12 times of their salary. This is an assurance that Pfizer's corporate management has a trust in their company and they value their investors.

Competitive Advantage

The company's drug portfolio is unmatched in terms of breadth and depth and broadest product lines in its field. Principal products