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For These 3 Stocks, Recent Weakness Yields Potential Opportunity

By Peter Stephens – Feb 11, 2014 at 9:34AM

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These companies reported tough numbers this past quarter. Here's why this may be a great opportunity.

When Pfizer (PFE 0.73%)Bristol Myers-Squibb (BMY -0.13%) and Eli Lilly reported earnings recently, all three noted that net income had declined compared to the year-ago quarter, as generic inroads on former blockbuster drugs continue to weigh on the bottom lines for each these pharmaceutical companies. Nonetheless, I see potential for future earnings growth and think that Foolish investors should watch these stocks carefully.

Pfizer continues to endure mounting costs for its major restructuring, as well as increased competition from generic competition. Indeed, this generic competition and the decline in revenue from former blockbuster drugs is hitting the company hard. Revenue was down 2% in the quarter and the signs are that it will take more time for Pfizer to address its loss of key drugs.

Putting aside the one-off items (such as restructuring costs), earnings per share would have been a more respectable $0.56 per share (rather than the $0.39 that was reported). This beat Wall Street expectations of $0.52 (excluding one-off items), yet it's still a considerable fall from the previous year. But shares bounced after the results were released and improved by as much as 5% before pulling back this week. The fact that they can make gains following a 59% fall in earnings may at first seem strange, but when the market is expecting worse then it starts to make sense.

In addition, the fact that Pfizer expects to deliver earnings growth in 2014 and 2015 despite the continued major restructuring highlights the long-term strength of the business. Indeed, the market seems willing to give the company the time it needs to address the increased generic competition that is hurting the top and bottom lines.

Of course, Pfizer isn't the only pharmaceutical company that endured a disappointing fourth quarter update. Bristol-Myers Squibb and Eli Lilly  also posted fourth quarter falls in net profit (compared to the same quarter in 2012), with both companies also suffering from the effects of increased generic competition for former blockbuster drugs.

In Bristol-Myers Squibb's case, blood thinner Plavix and blood pressure drug Avapro continue to be hit hard, while Eliquis (approved only a year ago in partnership with Pfizer) contributed just $71 million to a top line of $4.4 billion. As with Pfizer, Bristol-Myers Squibb is seeking to restructure the business, aiming to become a specialist, niche player as opposed to focusing on volume drugs.

Meanwhile, Eli Lilly saw fourth quarter net income fall by 12% as it lost patent protection for its top-selling product, the antidepressant Cymbalta. Furthermore, the bone-building drug Evista is set to come off-patent as early as next month, with these two losses expected to mean a tough year for the business.

However, it's not all doom and gloom for Pfizer, Bristol-Myers Squibb and Eli Lilly. All three companies are facing challenges but, encouragingly, they are on the path to restructuring their respective businesses to counter the difficulties posed by generic competition. Sure, it may take time for them to overcome this challenge, but the market seems comfortable with their long-term plans. Beating quarterly expectations, of course, is a good way to buy even more time and further improve sentiment.

Peter Stephens has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Pfizer Stock Quote
Pfizer
PFE
$49.57 (0.73%) $0.36
Bristol Myers Squibb Stock Quote
Bristol Myers Squibb
BMY
$79.14 (-0.13%) $0.10

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