Drip
Portfolio Report
Friday, November 14, 1997
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Nov. 14, 1997) -- You might recall that Pfizer (NYSE: PFE) is divided into three businesses: healthcare (pharmaceuticals), animal healthcare, and consumer healthcare. The company is the leader in animal healthcare and aims to be the leader in pharmaceutical sales as well.
For the third quarter, pharmaceutical revenue increased 11% (drug sales grew 19% in the U.S. and 5% internationally, though sales would have grown 12% internationally if not for the effect of foreign exchange). The pharmaceutical division earned $2.6 billion of Pfizer's $3.09 billion in third quarter revenue. Animal healthcare sales increased 7% to $324 million, and consumer healthcare revenue rose 5% to $123 million.
In pharmaceutical sales, some of the top-sellers were cardiovascular drugs (Pfizer leads in this important area) as sales of Norvasc grew 22% to $574 million, making the drug the largest-selling cardiovascular medicine in the world. Sales of Zoloft, the antidepressant, rose 13% to $395 million following launches in Germany and France. Also, the launch of two other products have seen unprecedented early success (a Foolish reader who is in the industry wrote us about the success seven weeks ago). The two new alliance drugs are Aricept and Lipitor. Lipitor is the second largest selling drug in its category, and Aricept already accounts for more than 95% of all Alzheimer's disease prescription drug sales.
Below are Pfizer's numbers for the first nine months of 1997 compared to 1996:
Pfizer, Inc.
Nine Months Ending in Sept.
(millions of dollars, except per share data)
1997 1996 Change
Net sales $8,855 $8,146 9%
Alliance revenue 153 0 **
Total revenues 9,008 8,146 11
Costs and expenses
Cost of sales 1,601 1,556 3
Gross Margin 82.2% 80.8%
Selling, informational
and admin. exps. 3,545 3,117 14
Research and dev.
expenses 1,351 1,194 13
Other deductions--net 201 204 (2)
Income before provision
for taxes on income and
minority interests 2,310 2,075 11
Operating Margin 25.6% 25.4%
Provision for taxes on
income 647 643 1
Minority interests 8 7 15
Net income $1,655 $1,425 16
Net Margin 18.3% 17.4%
Earnings per common
share $1.27 $1.11 14
Pfizer's margins improved on all measures year-over-year, and net margins improved from the average trailing twelve month numbers as well. Recall that Johnson & Johnson (NYSE: JNJ) recently had margins of 68.9% gross, 22.3% operating, and 15.7% net. Pfizer's recent margins were 82% gross, 25.6% operating, and 18% net. Johnson & Johnson has a much higher cost of goods sold, percentage-wise, because pharmaceuticals account for only 33% of sales and more expensive consumer and hospital products account for another 33% of sales each. With 84% of Pfizer's sales in the third quarter coming from drugs, the company's gross margins are monstrous -- 82% versus J&J's 69% gross margin.
Pfizer's nine-month operating margins (at 25% compared to J&J's 22%) are impressive as well. Though Pfizer spends as much as Johnson & Johnson on research and development (while having only half the sales volume of the $23 billion behemoth), Pfizer's operating margins are higher. Before we wax too poetic about Pfizer, though, a person should be equally impressed with Johnson & Johnson. The industry giant achieves operating and net margins that are nearly as strong as Pfizer's while being much better diversified, rather than relying so heavily on drug sales.
Looking at the nine-month numbers above or in Pfizer's recent press release, the only item that might be worth considering twice in a negative sense is the increase in sales, general and administrative expenses. Those expenses rose 14% while net sales increased only 9% (before alliance revenue brought the total sales increase to 11%). The newly begun alliances do add some administrative costs, and the 14% rise in these costs could be the result of any number of factors so it's only worth watching in the long run. If these expenses continue to rise more quickly than sales (this is very doubtful, considering the new drugs coming down the pipeline) then operating margins and net margins would be suspect to decline.
For the year, Pfizer is on track to exceed $12 billion in revenue, and the company recently stated that it is comfortable with earnings estimates of $1.70 per share for fiscal 1997. In 1998 Pfizer expects to launch three new drugs: Trovan, an antibiotic; Zeldox, to treat symptoms of schizophrenia; and Viagra, an oral treatment for male erectile dysfunction. Viagra could achieve billions of dollars in sales in short order if it's successful. As a whole, the company's development rate of 15 to 18 new drug candidates each year (for the past three years) is a company record, and at the current research and development spending rate, the company is on track to continue with similar progress.
Still, the stock is rich at 36 times 1998 earnings estimates while earnings are expected to grow 18% that year and 16% annually for the next five years. Yet, with so much promise in the future it isn't very likely that Pfizer's stock would descend considerably because so many investors are waiting for any chance to buy at lower prices. The stock would almost certainly decline, though, if any expectations are not met (even in the short term), or if the market corrected. As seen in the recent sharp market decline, Pfizer's stock has more air beneath it than less richly-valued stocks like Johnson & Johnson, though it did rebound quickly. Finally, in the intermediate term it's not easy to see the stock rising considerably until earnings catch up and the price-to-earnings multiple contracts.
Of course, this could happen sooner rather than later if Viagra is as large a seller as hoped for, but buying the stock on the possible success of one drug alone is, of course, very foolish -- without the capital "F."
For DRIP investors the rich valuation "dilemma" is somewhat different. The risk isn't as large if you dollar cost average into the company, of course. At this valuation, though, even a DRIP investor should realize that it could be more difficult to beat the market in the intermediate term (3 to 5 years). But like Johnson & Johnson, over the coming decades Pfizer is among the best of any company to consider as a long-term -- aye! -- a lifetime investment possibility.
We'll check back with Pfizer at the end of the fourth quarter. We all know that the company matches nearly all of the criteria that we look for in a DRIP candidate: sales and earnings growing by double digits; double digit margins that are improving; improving return on equity; excellent management, industry leadership, and the likelihood of continued and improving business success. Pfizer doesn't meet the criteria only in the share buyback arena and in increasing its dividend.
Next week we'll return to our research of food and beverage stocks. I'll begin with Anheuser Busch (NYSE: BUD), which trades at 18 times earnings and yields 2.40%.
Have a Foolish weekend!
--Jeff Fischer
TODAY'S NUMBERS
Stock Close Change
Intel $78 3/4 +13/16
Day Month Year History
Drip: 0.41% 0.13% (8.78%) (8.78%)
S&P: 1.18% 0.22% 23.75% (3.65%)
NASDAQ: 1.04% (2.25%) 20.66% (2.26%)
Rec'd # Security In At
9/8/97 1 Intel $94.69
Base: $800.00
Cash: $665.31**
Total: $743.25
GOAL: The portfolio began with $500 on July 28, 1997,
adds $100 on the 15th of every month, and the goal
is to grow the port to $150,000 by August of the year 2017.
**Transactions in progress:
1. $81.00 sent on 10/17/97 to buy one share of JNJ and
enroll in its DRIP.
2. $300.00 sent on 10/23/97 to buy more shares of INTC.
The Drip Portfolio has been divided into
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