Is Pfizer Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Pfizer (NYSE: PFE  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Pfizer's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Pfizer's key statistics:

PFE Total Return Price Chart

PFE Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

3.4%

Fail

Improving profit margin

89.3%

Pass

Free cash flow growth > Net income growth

161.8% vs. 95.7%

Pass

Improving EPS

94%

Pass

Stock growth (+ 15%) < EPS growth

88.9% vs. 94%

Pass

Source: YCharts. *Period begins at end of Q1 2010.

PFE Return on Equity Chart

PFE Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

86.1%

Pass

Declining debt to equity

(4.4%)

Pass

Dividend growth > 25%

33.3%

Pass

Free cash flow payout ratio < 50%

43.4%

Pass

Source: YCharts. *Period begins at end of Q1 2010.

How we got here and where we're going
Pfizer comes through with flying colors, missing out on a perfect score only because its revenue hasn't held onto its late 2010 highs. However, net income has boomed over the last two years and has been outpaced by free cash flow, a performance that's contributed to two passing grades today. But how might Pfizer increases its revenue in the coming years? Let's dig a little deeper to find out.

Earlier this week, Pfizer announced that tofacitinib (marketed as XELJANZ), a rheumatoid arthritis treatment, has been approved for patients who had an inadequate response to existing therapies in several countries around the world, including Switzerland, Argentina, Kuwait, the UAE, and Russia. Up to a third of RA patients don't adequately respond to available treatments, and about half stop responding to any particular DMARD treatment within five years, according to a Pfizer press release. And with millions of patients at stake, XELJANZ could become a blockbuster, despite having a rather awful name.

Palboclib, a treatment for breast cancer, which Pfizer licenses from Onyx Pharmaceuticals (UNKNOWN: ONXX.DL  ) recently received breakthrough therapy designation status from the Food and Drug Administration this year.  On the other hand, Pfizer's new chronic myeloid leukemia drug Bosulif has been rejected by the U.K.'s cost agency National Institute for Health and Clinical Excellence. You win some, you lose some.

Pfizer's most notable recent move was the spinoff of Zoetis (NYSE: ZTS  ) , its former animal-health subsidiary, earlier this year. Zoetis has lost a bit of steam since it hit the market earlier this year, underperforming its former corporate parent since February. However, interest was high enough in a recent exchange of Pfizer shares for Zoetis shares that the program was oversubscribed, and only about a quarter of the nearly 1.7 billion shares tendered were accepted for the transfer. That indicates a bit less excitement in Pfizer's future than its recent share performance might suggest -- roughly a quarter of Pfizer's entire float was tendered for the exchange.

Pfizer's board also authorized a new $10 billion share-repurchase program this past week. This new buyback, plus the remaining $3.9 billion from the existing buyback plan, adds up to nearly 7% of the company's current market cap. Over the past few years, Pfizer has embarked upon four different repurchase programs worth roughly $39 billion, including the latest authorization. Pfizer also plans to retire around $11.4 billion in shares with its Zoetis spinoff. That adds up to a pretty hefty nudge on EPS, but with shares moving toward all-time highs last reached during the dot-com bubble, investors should wonder if all these buybacks are really the best use of Pfizer's hoard.

Putting the pieces together
Today, Pfizer has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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  • Report this Comment On July 18, 2013, at 8:31 PM, EllenBrandtPhD wrote:

    PFE's stock has been kept down the past three weeks almost exclusively by speculation that it might come in as the White Knight for Onyx.

    I said - along with many others - that this speculation was uttterly ridiculous, because PFE doesn't over pay for anything - period.

    Now that PFE confirmed late today - in the last hour of the trading day - that it will NOT be Onyx's White Knight, the stock should logically start moving higher again tomorrow up until its earnings report two weeks from now, when I think - not sure, but think - the mostly Long MMs would very much like to "place" it in the just-above-30 range.

    Yes, there are Shorts. and they are vocal. But they don't really have a leg to stand on until earnings come out and everyone sees how much of a dent in share count the steady buyback has made. In many ways, this is a pure financial engineering story now, with some thinking that PFE management wants a 20-25 percent lower float within the next year.

    On the expansion side, I still think PFE does make a bid for Biocad and its world-class scientists, if they can get it at the reasonable price they want. They are clearly the front runner. Chances are, however, that they won't make an announcement until after earnings, because - why do the opposite?

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