For These 3 Stocks, Recent Weakness Yields Potential Opportunity

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.

The Motley Fool's top stock for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2833893, ~/Articles/ArticleHandler.aspx, 8/28/2014 1:26:47 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement