Pfizer's Palace
Still standing after all these smears

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (June 15, 1999) -- Since our decision to buy Johnson & Johnson (NYSE: JNJ) on October 8, 1997, the stock has gained 54.7% including reinvested dividends. Over the same period, Pfizer (NYSE: PFE) gained 53.5%. (Both returns are measured from 10/10/97 to 6/11/99.)

The returns when dollar-cost-averaging are significantly different, however, and push the results firmly in Johnson & Johnson's favour (to be British about it). J&J's stock steadily rose from $60 in October of 1997 -- sloooowly, steeeeadily -- to hit $103 just last month before declining to the $90s again. Pfizer, on the other hand, rose rapidly on the promise of Viagra. Its October 10, 1997, price of $64.50 nearly doubled to $118 by April of 1998. The stock toiled most of 1998 well above $100 (typically in the 100 and teens), and then it rose to $150 by April this year. Ah, but April was "the good old days, chaps." From the April Mountain High, Pfizer has fallen back to $97.

This means that drip investors (including Drip Port) would have bought Pfizer repeatedly last year at above $100 (we were buying J&J instead -- mainly in the $70s) and would now be sitting on an investment residing under a thin film of water. That's not a horrible concern for a long-term, regular investor in a company as strong as Pfizer, but being underwater (or close to it) after 20 months is less than ideal.

We choose J&J over Pfizer due to J&J's diverse business (it is the most diversified healthcare leader in the world), and due to its valuation compared to Pfizer at the time. Although valuation isn't as important for dollar-cost-average investors, it still is important. Essentially, what you pay for a company will determine the total return you achieve with its stock, all other things being equal.

We put Pfizer in the back of our heads for further study as we bought J&J, and there it remained. We said that we'd come back to it and we have periodically. Now is again a good time to consider Pfizer.

Pfizer is one of the most respected pharmaceutical companies in the world and management is skillfully pursuing the coveted Number One slot concerning pharmaceutical research and sales. The company hasn't taken any tactical mis-steps in the past year, but the stock is now at the same price that it traded at in March of 1998. Since then, five quarters of double-digit earnings growth have been accomplished, stock has been repurchased, the dividend has been raised -- all that, but the stock price is the same. The valuation has contracted, of course, from a P/E of above 50 to a trailing P/E of 36 today.

The stock's decline was precipitated by several factors. First, the valuation was aggressive and it represented the best case scenario. The "best case" began to unravel like a cheap imitation purse (the likes of which you can buy on the streets of Florence) as Viagra sales fell below expectations and even suffered a quarterly sales decline rather than growth. First quarter '99 sales of the most hyped and talked about drug in history (following illegal drugs) declined from $236 million to $193 million. Of course, the first quarter may be slow every year because the drug could prove seasonal. With spring, sales might increase.


The second marble slab to fall from the Pfizer Palace was Trovan. This antibiotic is so effective at killing that it's damaging liver tissue. The FDA moved to restrict use of the drug to life-threatening instances following reports that 140 patients suffered liver damage from Trovan. Sales of Trovan reached $160 million last year and were expected to top $300 million this year and could have conceivably totaled $1 billion in sales in four years. Those projections have been slashed like dead corn, however, following the U.S. decision to curtail sales -- a decision that is actively being adopted overseas, too. Although Trovan represented under 2% of Pfizer's 1998 sales, it stood for about 3% of the next two year's earnings per share estimates.

One or two drugs won't make or break Pfizer, however, and doctors are posting on the Pfizer message board right now that the company has the strongest drug pipeline of any pharmaceutical in the whole cotton pickin' world, something that we agreed with almost two years ago -- as did all of the civilized peoples. (Generally speaking, that is.)

Pfizer has recently been diagnosed Foolishly at the Motley Fool. Louis Corrigan wrote about the Trovan Massacre last week, and Matt Richey outlined Pfizer's fundamentals and focus in a Rule Maker column, as well as highlighting the intelligence in the Fool's Pfizer folder two weeks later.

So, Pfizer is a worldclass company, but does it sport a world-size valuation, too? After five quarters of earnings growth and zero stock price appreciation, perhaps not. (I don't know yet.) Tomorrow we'll look closely at Pfizer's valuation. The company has fairly predictable sales growth and with that predictable cash flow, greatly aiding us in a long-term projection. Let's talk cash, baby.

Uh, tomorrow.

Food and Beverage. We'll share our list of companies for consideration this week. Please post your thoughts on the Drip Companies message board.

3 Times Weekly. We're considering taking this column to a three-time weekly schedule (M, W, F) for reasons discussed in this thread on the Drip Basics board. Please check that out and post your thoughts.

Our Next Investment. We will send $100 to Intel (Nasdaq: INTC) this week for our July investment.

See you on the message boards. Fool on!

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