<THE RULE MAKER PORTFOLIO>
By Phil Weiss (email@example.com)
Towaco, NJ (Feb. 3, 1999) -- Tonight I'm going to wrap up my discussion of the recent earnings releases of our companies by writing about Pfizer's (NYSE: PFE) most recent earnings report. I have to say, Pfizer's quarterly earnings releases are among the most informative that I've come across. However, like all the other pharmaceutical companies that I have studied, the company does not open its conference calls beyond the analyst community.
In addition, the companies in this industry fail to disclose their balance sheets at the time that earnings are released. Without this information, it is not possible to fully evaluate Pfizer's most recent performance. If you're interested in reading more thoughts on how companies disseminate information to individual investors, you should check out last week's excellent special feature on Investor Rights.
Pfizer's income statement is presented both before and after unusual items. Among the unusual items are the financial results of the Medical Technology Group and the gain from its divestiture during 1998. I'm going to present the numbers as management suggested and then discuss the unusual items in a little more detail. Here are Pfizer's numbers for the quarter and the year:
(scroll down, if necessary, for table)
4th Q 1998 4th Q 1997 FY 1998 FY 1997
Sales $3.9 bil. $3.1 bil. $13.5 bil. $11.1 bil.
Gross Margin 84.3% 82.7% 85.4% 83.9%
Earnings $0.7 bil. $0.5 bil. $2.6 bil. $2.1 bil.
Net Margin 18.4% 16.3% 19.4% 18.8%
All in all, those numbers look great. Margins continued to expand. Revenues grew by 26% for the quarter and 23% for the year. I'm not surprised to see this continued strength in Pfizer's income statement. Hopefully, when the balance sheet is released with the 10-K in March, we'll finally start to see some improvements in our company's collection of its accounts receivable as well. This is a pharmaceutical industry powerhouse. When it comes to collecting payments from customers, though, I'd like to see it start acting more like one. Pfizer has the highest accounts receivable turnover ratio of any pharmaceutical company I have studied. Although Pfizer's balance sheet is pretty strong, I believe it can be stronger. It did get stronger over the first three quarters of 1998; my belief is that it will get even stronger over time.
All right. Let's talk a little bit about the unusual items. Co-promotion payments made to Monsanto (NYSE: MTC) for Celebrex totaled $240 million. These payments represented one class of special charges excluded from the numbers I showed above. I understand why Pfizer has treated these payments this way. After all, Celebrex was not approved until December 31, 1998, so Pfizer did not realize any matching revenues from sales of this product last year. Therefore, the payment was in management's preferred presentation of results. One thing to keep in mind though is that when Pfizer starts generating income from sales of Celebrex (and early indications are that sales of this product will be great) we should consider offsetting those payments against Pfizer's share of Celebrex revenues in the future.
The largest unusual item was the $300 million contribution to the Pfizer Foundation. I think it's great to hear that our company is doing so well financially that it can put aside so much to benefit worthy causes. Having worked for a pharmaceutical company in the past, my guess is that amount isn't just cash. It's likely that some of it relates to Pfizer's pharmaceutical products being donated to worthy causes.
Another significant item was the write-off of $195 million of intangible assets most likely related to Pfizer's animal and consumer health groups -- businesses that did not fare as well during 1998 as Pfizer's pharmaceutical business. The final item worth noting was the $183 million of plant rationalizations and severance payments, which were related to the company's "exiting certain product lines." The treatment of these items sounds reasonable to me as well. If you have any questions about what I've included here tonight, please ask them on our Companies folder.
I think that it's important to look at the items that a company reports as unusual or non-recurring when it releases financial information. Currently there is a lot of controversy related to this subject particularly on behalf of the SEC. I'm going to talk more about this topic tomorrow night.
If you're a college hoops fan like me, be sure to catch the Duke-Maryland game tonight. The mighty Blue Devils are looking to extend their unbeaten run through the ACC as they try to move to the top spot in the polls.
Phil Weiss, Fool
Stock Change Bid AXP + 13/16 100.50 CHV +1 1/16 76.00 CSCO -1 17/64 111.13 KO - 3/8 64.50 GPS +3 3/16 66.94 EK + 7/8 66.75 XON +1 11/16 70.38 GM --- 89.44 INTC +4 1/16 138.69 MSFT - 13/16 166.81 PFE +1 1/16 133.75 SGP - 7/8 54.00 TROW - 15/32 33.50
Day Month Year History R-MAKER +0.66% -0.73% 8.22% 40.38% S&P: +0.80% -0.59% 3.80% 26.45% NASDAQ: +1.22% -0.50% 13.71% 49.63% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 166.81 113.13% 5/1/98 55 Gap Inc. 34.37 66.94 94.76% 6/23/98 34 Cisco Syst 58.41 111.13 90.25% 2/13/98 22 Intel 84.67 138.69 63.79% 2/3/98 22 Pfizer 82.30 133.75 62.52% 8/21/98 44 Schering-P 47.99 54.00 12.52% 2/6/98 56 T. Rowe Pr 33.67 33.50 -0.51% 5/26/98 18 AmExpress 104.07 100.50 -3.43% 2/27/98 27 Coca-Cola 69.11 64.50 -6.67% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 72.41 89.44 23.52% 3/12/98 20 Exxon 64.34 70.38 9.39% 3/12/98 20 Eastman Ko 63.15 66.75 5.70% 3/12/98 15 Chevron 83.34 76.00 -8.81% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 4003.50 $2125.05 6/23/98 34 Cisco Syst 1985.95 3778.25 $1792.30 5/1/98 55 Gap Inc. 1890.33 3681.56 $1791.23 2/13/98 22 Intel 1862.83 3051.13 $1188.30 2/3/98 22 Pfizer 1810.58 2942.50 $1131.92 8/21/98 44 Schering-P 2111.7 2376.00 $264.30 2/6/98 56 T. Rowe Pr 1885.70 1876.00 -$9.70 5/26/98 18 AmExpress 1873.20 1809.00 -$64.20 2/27/98 27 Coca-Cola 1865.89 1741.50 -$124.39 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 1230.89 1520.44 $289.55 3/12/98 20 Exxon 1286.70 1407.50 $120.80 3/12/98 20 Eastman Ko 1262.95 1335.00 $72.05 3/12/98 15 Chevron 1250.14 1140.00 -$110.14 CASH $120.62 TOTAL $32868.36 Note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.