Tuesday, February 10, 1998
TOWACO, NJ (Feb. 10, 1998) -- It was a strong day for the Cash-King Port, with every stock up at least $2 as of this writing, and Microsoft hitting a new high. Rather than focus on daily stock price movements, though, we have better things to do.
Every Wednesday, the Cash-King team of Fools likes to take reader questions received on our message boards. But today is Tuesday. So what better day than this to make it clear to you all that we regularly have questions about the process of making money in stocks, too. We're learning every day and week as well. And we'll be so bold as to suggest that any teacher who doesn't learn alongside her students is missing more than half the fun of it all.
In that spirit, this past week, I had a question of my own about our pharmaceuticals giant, Pfizer. So I decided to call their Investor Relations Department. Too many individual investors forget that a full department at yer average public company was named after them! The Investor Relations (IR) department at great companies is fashioned around your and our needs as shareholders of the business. If you have questions about companies that you own, do not hesitate to call them, e-mail them, mail them, or fax them into the IR department.
So, I called Pfizer (NYSE: PFE) at (212) 573-7584 to see what I could find out about the comparatively low turnover rate for their accounts receivable. As you probably know, we like to invest in companies that don't let bills sit unattended to -- they collect payments from their buyers up-front or after short delay. The accounts receivable turnover is a measurement of how long on average it takes companies to collect their bills. It's a simple calculation that everyone should run on their companies -- simply divide the last four quarters of sales by the current accounts receivable.
With Pfizer, we do feel they run a bit high. Now, before I called, I checked the accounts receivable turnover ratio of several other pharmaceutical companies -- Abbott Labs, Merck, Schering-Plough, Johnson & Johnson, American Home Products and Warner Lambert -- to see how they compared to Pfizer. What I found was that Pfizer and American Home were clearly the worst of this group, while Merck and Schering-Plough were the best. I did this additional legwork before I called, because truly the more research you've done on your own first, the more time investor-relation officers commit to answering your question. This seems to hold true throughout our lives, from high school to the business world to family life.
When I called Pfizer on Wednesday, I got little information at all. I was told that the question that I asked was not one that they'd really been asked before. The individual that I spoke to did tell me that he'd look into the situation and call me back. To be honest, I was quite skeptical about his offer. I figured we'd have to dig out an answer some other way at some later point in time.
I was quite surprised on Thursday morning to pick up the phone and hear Pfizer's head of investor relations on the other end of the line. We talked about the receivables and agreed that Pfizer's current accounts receivable turnover is in line with its historical norms -- it has ranged between 67 and 72 days over the last 5-6 years. I was told that the company is not concerned with this level of performance.
The explanation for the difference between Pfizer and Merck (NYSE: MRK) is that a large volume of Merck's products are sold through the Merck-Medco Managed Care. Pfizer does not have a Managed Care unit. I agreed that this made sense. The explanation for Schering-Plough's (NYSE: SGP) more attractive ratio was that SGP's consumer products business was more substantial than Pfizer's and that naturally payment terms for consumer products are shorter than for pharmaceutical products sold through to the world of business medicine. To be honest, though, even though Schering's consumer products business is larger than Pfizer's, it doesn't appear to me that the difference is significant enough to justify the discrepancy in A/R turnovers.
For now, Round One is complete.
We've learned a little about the company's thinking and the lay of the land in the industry. We have time enough in the years ahead to learn much more, and you can bet that we will continue to keep an eye on Pfizer's receivables turnover ratio. We do note that, at more than a 70-day collection period over the past four quarters, it's been at the high end of the five-year range. We're certainly not overly anxious about this, but it does represent a weakening in the "value" of the company's sales and earnings. The less money that they get up-front for their products, the less authority they have over their purchasers, and the less valuable are the profits (bird in the hand's worth two in the bush). Fools, if this ratio fails to improve over time, we'll be directing a more formal note their way.
This reminds us to add that in CK land, we're not going to be "shareholder activists" looking to annoyingly jostle our companies into greater efficiency. We'd sell our position in any company long before we had to become annoying. Also, it's pretty clear that the companies we'll be owning have been thriving long before we got here. Furthermore, Pfizer's balance sheet is still pleasing to our eyes. However, as stakeholders in the company, you can expect that where we see room for improvement, we plan to -- with patience and with the politeness of a child before his parents -- persuade the managers nudgingly to aim higher still.
Phil Weiss (email@example.com)
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