For These 3 Stocks, Recent Weakness Yields Potential Opportunity

These companies reported tough numbers this past quarter. Here's why this may be a great opportunity.

Feb 11, 2014 at 9:34AM

When Pfizer (NYSE:PFE)Bristol Myers-Squibb (NYSE:BMY) and Eli Lilly reported earnings recently, all three noted that net income had declined compared to the year-ago quarter, as generic inroads on former blockbuster drugs continue to weigh on the bottom lines for each these pharmaceutical companies. Nonetheless, I see potential for future earnings growth and think that Foolish investors should watch these stocks carefully.

Pfizer continues to endure mounting costs for its major restructuring, as well as increased competition from generic competition. Indeed, this generic competition and the decline in revenue from former blockbuster drugs is hitting the company hard. Revenue was down 2% in the quarter and the signs are that it will take more time for Pfizer to address its loss of key drugs.

Putting aside the one-off items (such as restructuring costs), earnings per share would have been a more respectable $0.56 per share (rather than the $0.39 that was reported). This beat Wall Street expectations of $0.52 (excluding one-off items), yet it's still a considerable fall from the previous year. But shares bounced after the results were released and improved by as much as 5% before pulling back this week. The fact that they can make gains following a 59% fall in earnings may at first seem strange, but when the market is expecting worse then it starts to make sense.

In addition, the fact that Pfizer expects to deliver earnings growth in 2014 and 2015 despite the continued major restructuring highlights the long-term strength of the business. Indeed, the market seems willing to give the company the time it needs to address the increased generic competition that is hurting the top and bottom lines.

Of course, Pfizer isn't the only pharmaceutical company that endured a disappointing fourth quarter update. Bristol-Myers Squibb and Eli Lilly  also posted fourth quarter falls in net profit (compared to the same quarter in 2012), with both companies also suffering from the effects of increased generic competition for former blockbuster drugs.

In Bristol-Myers Squibb's case, blood thinner Plavix and blood pressure drug Avapro continue to be hit hard, while Eliquis (approved only a year ago in partnership with Pfizer) contributed just $71 million to a top line of $4.4 billion. As with Pfizer, Bristol-Myers Squibb is seeking to restructure the business, aiming to become a specialist, niche player as opposed to focusing on volume drugs.

Meanwhile, Eli Lilly saw fourth quarter net income fall by 12% as it lost patent protection for its top-selling product, the antidepressant Cymbalta. Furthermore, the bone-building drug Evista is set to come off-patent as early as next month, with these two losses expected to mean a tough year for the business.

However, it's not all doom and gloom for Pfizer, Bristol-Myers Squibb and Eli Lilly. All three companies are facing challenges but, encouragingly, they are on the path to restructuring their respective businesses to counter the difficulties posed by generic competition. Sure, it may take time for them to overcome this challenge, but the market seems comfortable with their long-term plans. Beating quarterly expectations, of course, is a good way to buy even more time and further improve sentiment.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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