Is Viagra Boring?
Thursday, May 21, 1998
By Mark Weaver (MWEAV)
ANN ARBOR, Mich. (May 21, 1998) -- Stocks moved lower today as the tech sector and Pfizer led the retreat. Alan Greenspan's comments about the impact of Asia on our economy may have put a damper on investor enthusiasm as well. Bond investors were cheered and sent bond prices higher as fears of interest rate hikes were calmed by Greenspan's words.
The S&P lost 0.39% while the Nasdaq dipped 0.59%. The Borefolio took it on the chin as well dropping 0.87%. Six Borefolio stocks rose while two fell. There was no news on any of the Borefolio holdings.
I note that TCBY (NYSE: TBY) was up $3/16, closing at our purchase price of $10. Yup, the "news'" there is that we bought the stock yesterday. If you haven't had a chance, you might want to read Greg's TCBY buy report.
Pfizer's (NYSE: PFE) stock has certainly been in the news and was again today. In spite of today's drop, the stock has been a market leader. The excitement surrounding the stock has nearly matched the excitement of the many men in need of its latest, greatest product, Viagra. Since news of the release of Viagra Pfizer's stock has risen like... well, let's just say it has risen.
The promise of profits ahead and the prospects of even more products coming down the pipeline have spurred investors to value the stock at over 60 times trailing earnings and a multiple of cash flow of 52x. These aren't the kind of numbers which set value investors hearts aflutter.
Let's look back to 1990 when Pfizer sold for around $7 per share (split adjusted), 1/15 of the current quote. At that time the stock sold at a multiple of 14 times trailing earnings and a mere 10 times cash flow, well below its historic averages. It sold for under 2x book value! No one liked the stock. The pipeline was "rotten." On top of that, along came Clinton's healthcare reform initiative that threw the entire sector into a tailspin.
In spite of this bleak scenario Pfizer did have several great products on the market or well along in development, including Procardia, a widely used heart and blood pressure medication; Norvasc which is in the same category; and Diflucan, a prominent antifungal medication. On top of that, the pipeline was a lot "bigger" than had been believed.
In 1990, a cash flow based valuation -- similar to what Greg ran for Andrew (Nasdaq: ANDW) -- would have put "fair value" for Pfizer at around $10, or almost 50% above its price at that time. With a PE of 14 and a multiple of cash flow almost 40% below its historic mean, the downside risk could have been anticipated to have been small. It was simply difficult to see the upside amidst the noise created by naysayers. Those who looked at the valuation and ignored the crowd were rewarded 15 times over.
So, how does Pfizer appear today looking at discounted cash flow? Using a cash flow growth rate of 20% over the next 10 years (almost twice Pfizer's historic rate and above the 16% rate estimated by Value line -- I am trying to give Pfizer the benefit of the doubt), a growth rate of 10% at the end of the 10-year stretch, a discount rate of 12.5%, and a capitalization rate of 5.0%, and current fair value works out to $100. Even after falling almost 20% off of its highs Pfizer still trades above "fair value" and that's nothing to get... er... pumped up about.
I won't be surprised to see Pfizer go higher, though (although 15x over the next 8 years is a stretch). It is a great company and this is a bull market. But when the chickens come home to roost, and sometime in the next millennium they surely will, I'd rather be owning a stock which looked like Pfizer in 1990 than the current enhanced version. Today's drop in price following the reiteration of a warning about Viagra's interaction with nitrates shows how vulnerable this stock is to even the slightest bad news.
What drug stock looks like Pfizer in 1990? Not many, as it turns out, but a case could be made for Chiron (Nasdaq: CHIR) and Amgen (Nasdaq: AMGN). Chiron is "fairly valued" at a bit over $38 (current price $19) assuming a cash flow growth rate of 18% (well below Value Line estimates of 24%), while Amgen is valued at $90 (current price $61) assuming cash flow growth of only 14%. Both of these companies are well established, cash flow positive companies with excellent R&D efforts.
If you read the message boards and popular press and investment rags regarding Chiron and Amgen, you might get the idea you were reading about Pfizer in 1990 -- back in the days when Amgen and Chiron were way up on the P/E charts.
Contrarian investing?... well, that's probably just a bit too Boring... zzzzz.
FoolWatch -- It's what's going on at the Fool today.
Stock Change Bid ANDW + 3/8 22.13 CGO -1 3/8 35.13 BGP - 5/16 33.50 CSL - 3/4 50.19 CSCO - 15/16 77.69 FCH - 1/16 35.00 PNR - 15/16 43.50 TBY + 3/16 10.00 |
Day Month Year History
BORING -0.87% 1.00% 4.21% 31.13%
S&P: -0.39% 0.26% 14.86% 79.31%
NASDAQ: -0.59% -2.54% 15.96% 74.93%
Rec'd # Security In At Now Change
2/28/96 400 Borders Gr 11.26 33.50 197.61%
6/26/96 150 Cisco Syst 35.93 77.69 116.20%
8/13/96 200 Carlisle C 26.32 50.19 90.65%
3/5/97 150 Atlas Air 23.06 35.13 52.33%
5/20/98 400 TCBY Enter 10.05 10.00 -0.45%
4/14/98 100 Pentair 43.74 43.50 -0.55%
11/6/97 200 FelCor Sui 37.59 35.00 -6.89%
1/21/98 200 Andrew Cor 26.09 22.13 -15.20%
Rec'd # Security In At Value Change
2/28/96 400 Borders Gr 4502.49 13400.00 $8897.51
6/26/96 150 Cisco Syst 5389.99 11653.13 $6263.14
8/13/96 200 Carlisle C 5264.99 10037.50 $4772.51
3/5/97 150 Atlas Air 3458.74 5268.75 $1810.01
5/20/98 400 TCBY Enter 4018.00 4000.00 -$18.00
4/14/98 100 Pentair 4374.25 4350.00 -$24.25
11/6/97 200 FelCor Sui 7518.00 7000.00 -$518.00
1/21/98 200 Andrew Cor 5218.00 4425.00 -$793.00
CASH $5429.76
TOTAL $65564.14
