Which Way Pfizer?

Tom Gardner

Alexandria, VA (Aug. 28, 1998) -- To close out the week, I'd like to hold Pfizer's pfeet to the pfire, just as we did to Nine West. Harkening back to yesterday's report, the shoemaker's sales and earnings growth were strong, but its balance sheet was riddled with holes. Among them, Nine West has $687 million in long-term debt alongside just $24 million in cash, and a Flow Ratio rising Flow above 3.00.

We closed yesterday's report by noting that Nine West's problems are correctable, via inventory writedowns, an incentive plan that rewards efficient stores, and a commitment to pay down debt. I suggested that, after a weak fiscal 1998, Nine West should undergo a general business restructuring to weight their focus less toward next quarter's sales and more toward product management.

Well, the next chapter of the Nine West story was printed, as the company announced 1st Quarter 1999 numbers, recording business through the middle of June. Sales rose 10% and gross margins climbed to 42.6%. The company substantially increased its promotional costs for the quarter, driving net margins down to 1.6%. Finally, the company repurchased shares, reducing fully-diluted shares by 8.6%.

In general, the income statement again looked passably good. It's when I drop down to Nine West's balance sheet that my Foolish heart goes pitter-patter-pit-kathump-kathump-KATHUMP-KATHUMP. In its 1st Quarter 1999, Nine West's cash held steady at an unacceptable low of 0.034x long-term debt (with $663 million in debt and $22.5 million in cash).

That's bad news, but worse news comes via The Flow Ratio. From year-end 1998 to the 1st Quarter of 1999, Nine West's Flow Ratio has risen from 3.17 to above 4.30. The company has increasingly been forced to pay supplying vendors up front for their merchandise -- as total current liabilities fell from $210 million three months ago to $171 million today. In the meantime, unsold inventory and uncollected bills continued to climb. A Flow Ratio of 4.30 positions the company on foot heading South on Route 95 North.

Again, even as the company's income statement appears to be blossoming, the company's management of product flow and cash (the foundation of sound business, and in evidence on the balance sheet) has been very disappointing. And thus, the stock has raced splickety-lit from $50 to $18 1/4 today.

But this isn't going to be a second article in a row about a company struggling to maintain footing. No, no. We're going to take a peek at the recent direction of Pfizer's financials. Out on our Web boards, a Fool named "Ely" raised an excellent question. He asked (paraphrased), "In Wednesday's report, Tom outlined seven criteria to study quarterly performance. But in Thursday's report, he walked through Nine West's annual performance. How should we use this criteria -- quarterly or annually?"

The answer is: Both. The seven criteria are designed to measure comparable periods of any length. In reviewing Nine West yesterday, I matched up 1998 in its entirety against the whole of 1997. Then, in today's report, I compared Nine West's first quarter of fiscal 1999 with that of fiscal 1998. And today, in analyzing Pfizer, I'm actually going to compare this first six months of their calendar year against the same period last year.

The critical aspect of all this is that you compare similar periods against each other (i.e., 3rd quarter vs. 3rd quarter, fiscal year vs. fiscal year, etc.). You can also compare any full year against another -- for instance, stacking fiscal 1988 versus fiscal 1988 to get a sense of the direction of the business over a ten-year period. If you are thoroughly confused about this (or anything in this week's report, or any Cash-King Report), drop us a line in our Web Cash-King Strategy Folder.

Forward march!

Here's a look at Pfizer's first two quarters of this year versus the same period last year:

#1. Rising Sales

I favor companies that are growing sales at an annualized rate of 15%. Here are the six-month performance comparisons:

(in billions)
6-mo. 6-mo.
1997 1998

$5.86 $6.97

That marks growth of 18.9%, ahead of the ideal. Bravo.

#2. Rising Gross Margins

Gross margins at Pfizer are on the rise, and have been for a number of years. And the six-month comparisons are. . .

6-mo. 6-mo.
1997 1998

82.1% 83.8%

That marks a rate of growth of 2.1%, which fits it in our "Neutral" category.

#3. Rising Net Margins

Ah, yes, margins keep heading higher. The six-month comparisons show that Pfizer's net margins have grown at the rate of 5.6%.

6-mo. 6-mo.
1997 1998
17.9% 18.9%

Any growth rate above 5% ranks it with the elites. Ideal!

#4. Share Buybacks

Pfizer has been holding the line on its fully-diluted shares, showing little creep over the six-month period -- with just 7 million additional shares of ownership.

6-mo. 6-mo.
1997 1998
1,310 1,317
(in millions)

And that marks 0.5% growth over the period, which ranks Pfizer in the "Neutral" category on share buybacks.



We just raced a lot of numbers by you, so let's walk out an overview of the first half. (Is Brent Musburger out there?)

Through the first six months of 1998, Pfizer has done a fine job of inching its business into greater profitability. The launch of Viagra helped fuel sales growth of 18.9%, with gross and net margins following suit. A very strong suit, indeed.

In yesterday's performance, Nine West shined on the income statement, but lost its footing on the balance sheet. What opf our pfair pfarmaceutical Pfizer?

#5. Cash Outgrowing Debt

The company's cash-to-debt comparisons have weakened over the past year. Six months ago, the company had $200 million more in cash than it does today. Long-term debt has essentially held steady over that time. And so, the ratio has weakened.

Cash-to-Debt Ratio

6-mo. 6-mo.
1997 1998
3.01x 2.76x

Let's call this a mild negative.

#6. Lowering Flow Ratio

The Flow Ratio measures the rapidity with which a company can turn inventory into collected bills, while holding off payments to its suppliers. In essence, how quickly can Hershey's turn cocoa, milk, and sugar into a sold candy bar -- and how long can Hershey's hold off payments for the cocoa, milk, and sugar. As always, if this logic is lost on you, check our Flow Ratio Explanation.

Over the past six months, here's the direction of Pfizer's Flow Ratio:

6-mo. 6-mo.
1997 1998
0.80 1.01

This is a distinct negative for Pfizer. The rising Flow Ratio is entirely the consequence of a 23% growth in the level of accounts receivable. It's a bad sign whenever accounts receivable outgrow the rate of sales -- which is the case here. This is an indication that, to get product out to the public, Pfizer has lightened up on its collections. That's behavior which can fuel short-term sales growth and margin expansion, but compromises the merit of the growth.

This is not a serious negative for Pfizer, as their Flow Ratio is still well below our 1.25 boundary line. That said, the direction is worrisome.

#7. Expanding Possibilities

Without a doubt, Pfizer has excellent worldwide-expansion opportunities -- with new drugs in the pipeline and promotable products today. For example, to date, over 99% of Viagra's sales have been in the U.S. With most foreign markets embracing the drug, there are enormous opportunities.


Pfizer is growing like a weed. Pfizer has a brand that is becoming ever more popular. Pfizer's business is strong. Pfizer's stock has been the second most rewarding in the Cash-King portfolio. Pfizer meets all of our many baseline Cash-King criteria.

That said, there are some notable developments on the balance sheet that we need to keep our eyes on. The pace of growth in accounts receivable is something Pfizer investors need to keep their eyes on.

On Monday, Al Levit is going to ink a surprise Cash-King report. And then for the remainder of the week, I'm actually going to return to discuss Microsoft's business model and the cries of monopoly, Monopoly, MONOPOLY.

Have a great weekend, Fools.

Tom Gardner

Cash-King Strategy Folder
Cash-King Companies Folder

08/28/98 Close

Stock  Change    Bid 
 AXP   -2 5/8   87.63 
 CHV   -  1/4   75.25 
 CSCO  -4 7/16  94.69 
 KO    -2       72.75 
 GPS   -2 9/16  56.44 
 EK    -2 7/8   81.56 
 XON   -1 11/16 67.56 
 GM    +  5/16  61.06 
 INTC  -2 3/4   77.00 
 MSFT  -3 3/4   105.25 
 PFE   -2       101.88 
 SGP   -2 1/16  95.00 
 TROW  -2 3/16  31.44 
                  Day   Month    Year  History 
         C-K      -3.12%  -7.38%   5.70%   5.70% 
         S&P:     -1.53%  -8.35%   2.58%   2.58% 
         NASDAQ:  -2.77% -12.43%  -0.80%  -0.80% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    105.25    34.47% 
     2/3/98   22 Pfizer        82.30    101.88    23.79% 
     5/1/98   37 Gap Inc.      51.09     56.44    10.47% 
    6/23/98   23 Cisco Syst    86.35     94.69     9.66% 
    2/27/98   27 Coca-Cola     69.11     72.75     5.27% 
    8/21/98   22 Schering P    95.99     95.00    -1.03% 
     2/6/98   56 T. Rowe Pr    33.67     31.44    -6.64% 
    2/13/98   22 Intel         84.67     77.00    -9.06% 
    5/26/98   18 AmExpress    104.07     87.63   -15.80% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     81.56    29.16% 
    3/12/98   20 Exxon         64.34     67.56     5.02% 
    3/12/98   15 Chevron       83.34     75.25    -9.71% 
    3/12/98   17 General Mo    72.41     61.06   -15.67% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2526.00   $647.55 
     2/3/98   22 Pfizer      1810.58   2241.25   $430.67 
     5/1/98   37 Gap Inc.    1890.33   2088.19   $197.86 
    6/23/98   23 Cisco Syst  1985.95   2177.81   $191.86 
    2/27/98   27 Coca-Cola   1865.89   1964.25    $98.36 
    8/21/98   22 Schering P   2111.7   2090.00   -$21.70 
     2/6/98   56 T. Rowe Pr  1885.70   1760.50  -$125.20 
    2/13/98   22 Intel       1862.83   1694.00  -$168.83 
    5/26/98   18 AmExpress   1873.20   1577.25  -$295.95 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1631.25   $368.30 
    3/12/98   20 Exxon       1286.70   1351.25    $64.55 
    3/12/98   15 Chevron     1250.14   1128.75  -$121.39 
    3/12/98   17 General Mo  1230.89   1038.06  -$192.83 
                               CASH     $48.07 
                              TOTAL  $23316.63 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.

*The year for the S&P and Nasdaq will be as of 02/03/98
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