Drip Portfolio Report
Tuesday, September 16, 1997
by Jeff Fischer (TMF Jeff)

ALEXANDRIA, VA (Sept. 16, 1997) -- We've learned that 72% of sales at PFIZER (NYSE: PFE) are in pharmaceuticals, with cardiovascular drugs accounting for 30% of total sales, and infection remedies comprising 20%. Moving down, the company's hospital product division makes up 13% of sales, and its animal healthcare products about 11%. Its consumer products comprise 4% of total sales. All divisions have been growing, but the pharmaceuticals are obviously the most important and are the company's focus. The strong margins are in pharmaceuticals.

Pfizer aims to be the largest company in regards to research-based healthcare, and it spends more than its peers on research and development. Pfizer's new product portfolio is the strongest in its history based on sales growth and age diversity of products within the portfolio.

We've also learned that SCHERING-PLOUGH (NYSE: SGP), with half of Pfizer's trailing $12 billion in sales, has a product mix that is 90% pharmaceutical. The company's allergy drug, CLARITIN, accounts for nearly 20% of revenues. Schering-Plough leads in allergy and respiratory drugs, and those drugs comprised 36% of total sales last year. It's next big winners are anti-cancer and anti-infective drugs, accounting for 19% of 1996 revenue.

Schering-Plough has trailing profit margins of 21%; Pfizer, 17%. The companies are expected to grow 14% and 16% annually over the next five years. The stock of Schering-Plough trades at 25 times this year's estimated earnings, while Pfizer trades at 34 times its estimate. Our next considerations (Abbott Laboratories and Johnson & Johnson) are also growing at comparable rates at trade at 24 to 25 times estimates for the year. I haven't found a reason why Pfizer is valued at an earnings premium to these peers.

In the Drip Portfolio we're not overly concerned with current valuations, though. I believe that all four of these stocks are trading above their fair values, but in this market, they're not unrealistically priced. Investing in them steadily for twenty years, buying one or two shares at a time, there isn't one company among the four that I would wave off due to the current valuation. Though Pfizer, at this price, could see its earnings multiple contract much more than the others, all things being equal, and the stock could tread water for a few extra years -- that is, on the assumption that at some point these stocks will move closer to about 20 times trailing earnings again.

We're primarily studying each company to determine which *business* we want to buy, though. Once we have an overview of each of these four leaders, we'll then summarize them in a final recap or two in order to finally reach a conclusion on which company we want to buy, and why.

We gave an overview of all four companies on 9/2/97, and we looked closely at Schering-Plough's business on 9/3/97, and Pfizer on 9/11/97 (after Coca-Cola became a lengthy topic). All of these recent columns are available in the Drip Port Archives, which can always be reached from this very page that you're on right now.

Let's wrap up Pfizer by running it through the checklist that we use for guidance and to learn more about each company.

1. Consistently growing annual earnings by double digits. Sales at Pfizer have grown 11% annually over the past ten years, and earnings have followed suit. Last year the company grew earnings 23% on a 13% increase in sales, representing strong operating leverage. Sales have increased for 47 straight years.

2. Cash rich and low debt. Pfizer recently had $1.5 billion in cash and about $730 million in long-term debt.

3. Consistently improving return on equity and other performance measures. Pfizer has grown return on equity to a recent 30%, the second-best of our four companies, behind only Schering-Plough.

4. Consistently repurchasing shares. Late last year the company announced that it would repurchase up to $2 billion of its own stock over the next two years. In 1996 management bought 300,000 shares at about $88 a piece, or $26 million worth of stock. Pfizer has increased its dividend each of the last 29 years. The current yield is 1.20%.

5. Sporting double-digit profit margins. With operating margins of about 27%, the company had net profit margins ranging from 15% to 20% over the past four quarters, with the average profit at 17.5%. Only Schering-Plough has higher margins among our four choices.

6. Attracting and retaining top quality management. Pfizer has been acclaimed as one of the most respected companies in its business by financial magazines, and several physicians and others have written us at The Fool telling of their respect for Pfizer as well. That's "grassroots" analysis, good Fools.

7. Industry dominant. In the company's main drug niches, yes, it leads. It also leads in animal health. No single company dominates the entire vast world of healthcare, thankfully, and it's likely that no single company ever will.

8. And all of this: Sustainable. Pfizer expects to have seventeen major pharmaceutical products on the market by the year 2000, representing the strongest product line and distribution position that the company has possessed during its entire history. The company has several new and coming products in the works, and many should be granted about seventeen years patent protection each.

Pfizer's Web site (www.pfizer.com) is very investor-friendly if you're interested in more information. With this overview complete we'll begin to take a look at ABBOTT LABORATORIES (NYSE: ABT) tomorrow, to see what this company does to make its billions.

Finally, please note that Monday, the 15th, we added $100 to the portfolio. Hopefully you've saved at least $100 in the past month and can add it to your long-term savings as well.

Fool on!

--Jeff Fischer