Touchstone Pfizer
Plus, our new food list

by Brian Graney (TMFPanic)

ALEXANDRIA, VA (June 18, 1999) -- Over the past three days, Jeff has been taking a close look at Pfizer (NYSE: PFE) as an investment candidate for the Drip Port. As he explained in Tuesday's column, the company's valuation looks more attractive to us today than it did a year ago. There's an underlying lesson here, I believe, especially for newcomers to the long-term investing party. As TMF Selena said in a cameo appearance in this column last month, there are two main concepts all investors must consider when looking at a company: quality and price.

In the case of Pfizer, Jeff likes the company's economics, its management, and its prospects for earnings growth down the road. In fact, he's admired those traits for years, or at least for as long as this portfolio has been around. The quality of the business has been firmly established in his mind. He believes Pfizer is a top-tier quality company in a top-tier quality industry -- an industry which he happens to feel very comfortable investing in due to his experience, interests, and background at an investor.

But how much is he willing to pay for the business?

That's the $64,000 question we all need to answer as investors. On Wednesday, Jeff set up that question in relation to Pfizer and introduced a framework for determining if the company's current valuation is reasonable or not. That framework was put to the test in Thursday's column, which could have been subtitled Fun With Discounted Cash Flow Models. Speaking of yesterday's column, here's a short public service announcement from Jeff:

"Please note that last night's column on Pfizer's valuation had two meaningful number adjustments soon after publishing. The current column is the version that you should reference. Apologies for any inconvenience. --Jeff."

Of course, this week's columns on Pfizer only addressed half of the investing issue -- the issue of price. The quality part of the equation is an equally important consideration. In fact, considering our investing style and performance goals with this portfolio, perhaps quality is a more important concept than price. As fellow Fool Dale Wettlaufer put it in an article on this very topic last year, "You HAVE to be right about quality, but sometimes it's hard to pay too much for excellent quality."

If you find that statement seemingly foolish and not Foolish, I recommend examining his argument and how it relates to the so-called "Nifty Fifty" stocks that dominated investors' minds in the late 1960s and early 1970s. It's an interesting proposition, especially considering Pfizer and many other companies that we find interesting as possible investments are members of the Nifty Fifty. Were they overvalued then and are they still overvalued today? You be the judge.

As we've said many times, we're looking to invest in quality businesses that can beat the market consistently over time. Like Ford's advertising slogan says, "Quality is Job 1." A company's share price, and the expectations that are built into it, are typically the final things we consider when looking for possible investments. Not surprisingly, we placed a great emphasis on quality when selecting companies for our upcoming food and beverage study. Here's our list, which is subject to change of course:

Company                                 Forward P/E
Coca-Cola (KO)                                 46
PepsiCo (PEP)                                  31
Wm. Wrigley Jr. (WWY)                          30 
Hershey Foods (HSY)                            23
International Flavors & Fragrances (IFF)       23
Brown-Forman (BF.A)                            19
H.J. Heinz (HNZ)                               18
Philip Morris (MO)                             13

Looking at the first three companies on our list, we feel they might offer top-notch quality but we are less sure about their prices. The next four companies seem to offer quality at compelling prices at first blush, but we need to determine if they offer just "good" quality rather than "excellent" quality. In other words, what's the quality of the firm's quality?

The final consideration, Philip Morris, seems to be solid in both the quality and in the price categories, but has to lug around an 800-pound gorilla wearing a sweat-shirt emblazoned with the phrase "Sue Me" on its back. That litigation risk and the general social trend against smoking in this country need to be factored into our analysis, too.

To be fair, Big Mo is not the only potentially controversial stock on our list. Brown-Forman's main business, for those who may not be familiar with the company, is making and selling alcoholic beverages, most notably Jack Daniel's whiskey. We're not ruling anyone out just yet based solely on the products they sell. We are merely trying to identify the very best food and beverage businesses out there, plain and simple.

We will cross the socially responsible investing bridge when we get to it. Right now, we are focused on examining the dual issues of business quality and market price. We'll have more thoughts on these issues when we start evaluating the companies on our list individually in future columns.

Have a great weekend!

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