How High Can Pfizer Fly?

Shares of Pfizer (NYSE: PFE  ) hit a 52-week high on Wednesday. Let's take a look at how it got there and whether clear skies are still in the forecast.

How it got there
It's a little bit of a struggle to figure out how Pfizer has ascended to a new 52-week high considering that it lost patent protection on the best-selling drug in the world, Lipitor, and it's in the final stages of laying off an additional 16,300 employees in order to cut costs.

Including Lipitor, Pfizer is set to lose 23% of total fiscal 2011 sales over the next few years. With generic competitors Mylan (Nasdaq: MYL  ) and Dr. Reddy's Laboratories (NYSE: RDY  ) already producing significantly cheaper versions of Xalatan and Geodon, the company is scrambling for ways to replace drugs in its aging pipeline.

On the bright side, Pfizer continues to pay out an impressive dividend that yields nearly 4% and its forward P/E of just 10 would represent one of the lowest valuations in recent memory. Value investors looking for solid cash flow and a prime dividend continue to flock to Pfizer.

How it stacks up
Let's take a look at how Pfizer stacks up next to its peers.

PFE Chart

PFE data by YCharts.

Not surprisingly, the generic-drug producer Mylan is outperforming the large-scale pharmaceutical companies from which it pilfers its own generic pipeline.

Company

Price/Book

Price/Cash Flow

Forward P/E

Payout Ratio

Pfizer 2.1 8.9 9.8 63%
Merck (NYSE: MRK  ) 2.2 9.6 10.4 77%
GlaxoSmithKline (NYSE: GSK  ) 8.8 11.8 12.0 69%
Mylan 2.7 13.4 8.3 N/A

Sources: Morningstar and Yahoo! Finance. N/A = not applicable; Mylan doesn't pay a dividend.

Pfizer looks like the best buy on paper, but in reality I'd say it's far from it. It definitely has the most room to increase its dividend based on payout ratio alone, but it's contending with multiple drug expirations. GlaxoSmithKline is in the same boat as Pfizer with regards to patent expirations, but it has been eyeing acquisitions in India in an attempt to recapture some of its lost revenue. Merck, on the other hand, has been relatively unscathed. It's set to lose patent exclusivity on its blockbuster drug Singulair this year, but has a relatively healthy and safe pipeline beyond the loss. Finally, Mylan offers the most aggressive growth rates thanks to its generic portfolio, but it fails to pay its shareholders a dividend.

What's next
Now for the real question: What's next for Pfizer? That question really depends on whether Pfizer goes on the offensive and makes acquisitions, or ramps up its pipeline to replace the drugs set to fall off patent over the next few years. Based on Wall Street's revenue estimates, Pfizer could have some challenging times ahead.

Our very own CAPS community gives the company a four-star rating (out of five), with an overwhelming 90.3% of members expecting it to outperform. I am one of the few dissenters, having made a CAPScall of underperform on Pfizer, and am currently down seven points on that call. But, for those of you thinking I'm going to close this pick anytime soon...think again.

I called Pfizer the worst stock in the Dow Jones Industrial Average. Its erratic dividend, patent cliff woes, and rampant job cuts speak to the severity of Pfizer's internal problems. It doesn't help either that Pfizer's CEO, Ian Read, gave himself a hefty bonus in despite Pfizer's looming problems and job cuts. With revenue set to fall in each of the next two years according to Wall Street estimates, I have no problem with continuing to refer to this as the worst company of the Dow 30.

Craving more input on Pfizer? Start by adding it to your free and personalized Watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline, Pfizer, and Dr. Reddy's Laboratories. Try any of our Foolish newsletter services free for 30 days. 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.


Read/Post Comments (2) | Recommend This Article (6)

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.

  • Report this Comment On April 26, 2012, at 4:02 PM, rsinj wrote:

    How are dividends erratic?

    Dividends have been paid annually for the past 100+ years. A couple years ago, in 2009 it was reduced to support the acquisition of Wyeth in addition to resetting it to be more realistic with the stock price, competitors, and the general low interest rates in the market. Aside from that, the company has consistently raised the dividend annually.

    As of right now being wrong by 7 points is huge. Considering the moves the company has made in the last week and telegraphing where it's headed, you should prepare for even higher prices. The stock can easily go to $30 a share in the next 12 months and $40 in the following 12 months. You don't have to close your call, but with each point higher the stock goes, it makes your call even more of a black mark.

  • Report this Comment On April 26, 2012, at 5:07 PM, OmegaSD wrote:

    Yeah, I have to agree with rsinj. (To be fair, I am long PFE in my Roth IRA).

    Besides the 2009 cut for the Wyeth acquisition, PFE has been a solidly stable dividend payer, and if anything, more judicious by keeping its payout ratio reasonable compared to peers. In addition, they fetched 20% more than the market expected for their infant nutrition unit, and Read has stated he wants to use *some* free cash on share buybacks. The latest focus is now on how they can divest their animal science unit. That's supposed to be a share-swap (they expect to retain 20% share), which will both reduce outstanding share count as well as allow PFE to still keep some interest in a money-maker.

    You know how they say "past performance is not indicative of future results"? Just because PFE has been bad the past 5 years doesn't mean it'll be bad the next 5.

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