Rule Maker To Buy
February 02, 1998
**When Rule Maker announces an intention to trade, that trade will be made within the next five business days, as opposed to the very next day. For more detail on how buys are determined and how this portfolio originated, please read the "11 Steps to Rule Maker Investing" section of the Rule Maker Portfolio.**
Rule Maker Portfolio Buy Report
Announcement: Purchasing $1,875 in Pfizer stock.
An Overview of the Company
Pfizer Inc. is a global, research-based healthcare company headquartered in the Big Apple. The company discovers, develops, and markets prescription pharmaceuticals, hospital products, animal medicines, and non-prescription health care products. Over the last five years the most significant component of Pfizer's operations, its pharmaceutical business, has grown from the 13th to the 6th largest in the world.
Nearly 50% of the company's 1997 sales were in international markets, and today, Pfizer has over $12.5 billion in trailing twelve-month sales. In 1996, Pfizer was named the 8th most-admired corporation in a Fortune 1000 survey and was listed as the most admired Pharmaceutical/Healthcare company in Fortune's 1997 survey.
Again, Pfizer's main business is pharmaceutical products, which include products that fight cardiovascular diseases (including its leading $2 billion product Norvasc), infectious diseases, central nervous system disorders, diabetes, allergies, arthritis, urogenital disorders, and cancer.
Additionally, through its Animal Health division, Pfizer is the leading developer of veterinary medicines. The company also features a consumer products division with many familiar products, including Bain de Soleil sun care, Cortizone (America's leading over-the-counter hydrocortisone), Visine eye drops, Desitin diaper rash products, Plax pre-brushing dental rinse, and BenGay analgesics.
The Basic Financials
Pfizer has had 47 consecutive years of sales growth and 29 consecutive years of dividend growth. In addition, over the last five years, PFE has demonstrated consistent sales & earnings growth and widening profit margins. The company has been highly cash flow positive and has methodically increased its investment in research and development as a percentage of sales -- an extremely significant ratio in the business of medicine.
Let's start with a glance at some of the income statement numbers. (The complete 10-K is available for your perusal on Edgar)
1997 1991 6-Year Annual Growth Rate Revenue (Billions) $12.5 $6.6 11.7% Gross Profit Margin 81.8% 70.7% 2.7% Research & Development $1.9 $0.7 17.9% R&D / Sales 15.2% 11.3% 4.3% Net Profit (Billions) $2.2 $0.9 16.8% Net Profit Margin 17.6% 13.2% 5.1% EPS* $1.70 $0.52 23.0% * EPS is from continuing operations
Price: $81 3/4 Trailing earnings: $1.70 Calendar 1998 Estimated Earnings (Zacks): $2.03 Calendar 1999 Estimated Earnings (Zacks): $2.43 P/E on Trailing Earnings: 48.1 P/E on 1998 Estimate: 40.3 P/E on 1999 Estimate: 33.6
Basic Rule Maker Criteria**
Market Capitalization: $105.7 billion Gross Profit Margin: 81.8% Avg. Net Profit Margin: 17.6% Cash (and short-term securities): $1.92 billion Long-Term Debt: $729 million Cash as % of Debt: 2.63x Flow Ratio: 0.92 **all balance sheet data as of Sept. 28, 1997
Consensus 5-Year Growth Rate: 15.98 Debt as % of equity: 4.8 Debt as % of revenues: 5.8 Dividend Yield: 0.9% Return on Equity: 30.1% Return on Invested Capital: 28.5% **all balance sheet data as of Sept. 28, 1997
Concentrated Look at the Business
Pfizer's operations include 3 primary business segments:
1. Healthcare -- with approximately 85% of the company's total sales and 96% of the net profits over each of the last three full years.
2. Animal Health -- with approximately 11% of sales and 3% of net profits over each of the last three full years.
3. Consumer Healthcare -- with approximately 4% of sales and 1% of net profits over each of the last three full years.
The bulk of Pfizer's healthcare sales (85% over the last 2 full years) have been from sales of pharmaceutical products. Pfizer's pharmaceutical products group is comprised primarily of drugs that fall into the following major therapeutic classes: cardiovascular diseases, infectious diseases, and central nervous system disorders. Pfizer also has coveted products used for the treatment of such disorders as diabetes, allergies, and arthritis/inflammation.
Cardiovascular disease products have represented approximately 30% of Pfizer's consolidated net sales in each of the last three full years. They comprise the company's largest therapeutic product line. As mentioned above, Norvasc (used to treat hypertension and angina) was a $2 billion per year drug -- the first in Pfizer's history. In the pharmaceuticals business, a drug with sales of over $1 billion annually is generally viewed as a blockbuster product. In 1996 Pfizer had three such products: Norvasc, Zoloft (for treatment of depression and obsessive compulsive disorder), and Procardia XL (an older treatment for hypertension and angina).
Also included in the overall healthcare division of the company is Pfizer's Hospital Products Group, which consists of two components -- Howmedica and the Medical Devices Division. The four main business lines in the Hospital Products Group are musculoskeletal products, interventional cardiology and radiology products, surgical instrumentation, and urology products. The Hospital Products Group is the leading manufacturer of fluid management devices used in angioplasty and angiography procedures as well as the leading manufacturer of electrosurgical and ultrasonic surgical equipment.
Pfizer's second largest division, the Animal Health Group, is the world leader in discovering, manufacturing, and selling animal health products. These products are used to prevent and treat diseases in livestock, poultry, companion animals, and other animals. The principal products manufactured by this group are antibiotics, antiparisitics and anticoccidials for food animals, as well as vaccines and various companion animal products.
One of the major animal health products is Dectomax, which is used to treat internal and external parasites, primarily in cattle. This product, which received Food and Drug Administration approval in 1996, is primarily sold in the U.S., Japan, and Australia.
Pfizer's Consumer Health Care division has grown consistently in 1996 and 1997, but is still far and away Pfizer's smallest unit. It does, however, sell a wide variety of repeat purchase consumer products. The proprietary products are primarily related to general health, baby care, and toiletries. Cortizone (acquired from Thompson Medical) is America's leading hydrocortisone cream. Other leading consumer brands include the Bain de Soleil line of sun care products (acquired from Procter and Gamble in 1995), Visine eye drops, Desitin diaper rash products, Hemorid (the only brand of hemorrhoidal preparation designed expressly for women), Unisom sleep aids, BenGay analgesics, Rid pesticides, Barbasol shave creams and gels, and Plax pre-brushing dental rinse. The company has also focused on expanding and extending product lines in recent years. This business also provides a vehicle through which Pfizer can expand the commercialization of some of its prescription medications as they evolve from prescription to over-the-counter formulations.
A Look at Historical Stock Performance
Since 1986 (after adjusting for stock splits in 1991and 1997), Pfizer's year-end stock price has increased from $7 5/8 to its current level around $81 3/4, making for 21.9% annual growth. Earnings per share have grown by just under 12% annually over this period. The company has also increased its annual dividend for 29 consecutive years. Over the last three years, it has maintained a dividend payout ratio of 45% or less while still maintaining positive cash flow. The company has also diligently repurchased its own shares from the market.
Concerns Going Forward
Pfizer faces significant competition in its primary markets and is also subject to substantial government regulation. These factors place significant pricing pressures on the company. In addition, Pfizer and its competitors are constantly searching for technological innovation. To the extent that new products are introduced into the marketplace, Pfizer's existing products can either see a decline in market share or become obsolete. Generic competition also adds significant pricing pressure. Since the patent protection offered to Pfizer on many of its products offers it some price protection, the company is under constant pressure to continue developing new products. If it is unable to come up with new products... uh-ohh! Thankfully, Pfizer has a slew of great products on the way. Read on, Fool.
Prospects Going Forward
The mission statement in Pfizer's 1996 annual report states, "Over the next five years, we will achieve and sustain our place as the world's premier research-based health care company."
As evidence that the company is moving towards meeting this objective, its worldwide pharmaceutical sales grew 13% in 1997's third quarter (19% in the U.S. and 5% overseas). Additionally, over the last 12-month audit period, Pfizer's worldwide pharmaceutical sales have grown at twice the overall industry rate and have also exceeded industry averages in the U.S., Europe, Asia, and Latin America. The company's ability to continue growing is also supported by the fact that it has shown increased sales for 47 consecutive years.
The company has a long history of product innovation and is currently believed by many to have the strongest pipeline of new drugs of any pharmaceutical company. The company's R&D budget of $1.9 billion in 1997 should enable it to continue to meet or exceed its growth targets. Pfizer is also expending significant amounts to expand its already powerful marketing and sales force.
In 1998, it is expected that at least four new potentially huge drugs -- Trovan (an oral anti-biotic), Zeldox (an antipsychotic), Viagra (for male impotence), and Dofetilide (for antiarrythmia) -- will be launched. It is also expected that the introduction of Lipitor (an anti-cholesterol drug) and Aricept (for Alzheimer's disease) into additional markets will also increase Pfizer's profitability. Finally, there are a number of other exciting new products in Pfizer's pipeline, which we'll discuss along the way in our daily portfolio reports.
Currently, according to Zacks, the 27 analysts that follow the stock have forecast a mean 5-year EPS growth rate of 15.98%. The company has demonstrated an ability to grow at these levels (or higher) in the past, and there is no reason to believe it can't continue.
Of note, the company clearly trades at a premium to its 5-year annualized growth rate. This premium is based on both the company's long standing history of consistent, solid expansion and the high and increasing margins earned on its sales. The market rewards companies that deliver consistently by discounting that growth forward. Abiding the YPEG (5-year growth rate times projected year-ahead earnings), the growth is being discounted forward at least 1.5 years. This means Pfizer may go nowhere for awhile, but we're buying a slice of the business and looking toward retirement. 1.5 years of patience for 45 years of market-beating growth (if it meets our hopes) is a trade we're willing to make.
Is Pfizer Inc. a Rule Maker Stock?
From a Rule Maker perspective there are two things that are a little disconcerting about Pfizer -- the length of time taken to collect outstanding accounts receivable and the lack of a product that provides the type of consumer mind share like Johnson & Johnson (Band-Aids, Tylenol) or Abbott Laboratories (Selsun Blue and Similac).
In our opinion, consumer mind share with pharmaceutical companies is a little less relevant than it is with some of the other companies that are considered Rule Makers. Although consumers are the ones that use Pfizer's medicines, it's the doctors that prescribe them and dictate their purchase. Pfizer's historical performance indicates that the company does have strong mind share in the medical community.
As for the accounts receivable, they are within historical ranges. But we'd prefer to see them below historical ranges! So, we'll be keeping a close watch on this entry on the balance sheet. Expect regular calls to Pfizer headquarters from us at Rule Maker Global HQ and Remote Stations about this very subject. "Can we collect payments more speedily?"
We don't consider either of those two items significant enough to distract our eyes from this Pfilly. Pfizer passes all of the other Rule Maker tests with flying colors. We're excited to be a partner-owner in a business that has driven so much meaningful research in decades past and that has methodically grown a business that has rewarded customers, shareholders, and employees alike. Welcome, Pfizer... we look forward to learning more of you in the years ahead.
Fools, do consider dropping by www.pfizer.com to gather more information on this excellent company.