Being an international drugmaker like pharma giant Pfizer (NYSE:PFE) can be a real pain at times. Not only do you have to worry about growing sales at home in the middle of a recession, but you also have to try to grow sales around the world.
You have to deal with the difficulties and expense of getting drugs approved for use in all those other countries, as well as claiming and trying to keep patents as long as you can. And just when you think you've got it all down, bam! A move in the value of the dollar clobbers you.
That's what happened to Pfizer this quarter. For that matter, it's been happening throughout the industry, with competitors like Merck (NYSE:MRK) and Wyeth (NYSE:WYE) also biting the currency bullet.
Dealing with the dollar
You see, the dollar has gotten quite a bit stronger since this time last year, against several major currencies including the euro and the British pound. After doing foreign currency conversions, sales in Europe and Great Britain now translate into fewer U.S. dollars on Pfizer's financial statements.
For instance, last year on May 30, drug sales of 1,000 British pounds would have shown up as about $1,981 in revenue. This year, that same amount would have contributed only $1,614, an 18% drop. Assuming Pfizer gets bank rates, of course.
On the other hand, if you're a foreign company like GlaxoSmithKline (NYSE:GSK) or sanofi-aventis (NYSE:SNY) that sells in the U.S., the same currency changes that hurt Pfizer actually help you.
Pfizer said that its revenue was flat, assuming no change in the exchange rate. Given the recession, that isn't bad at all. But thanks to the stronger dollar, the company had to actually report $1.1 billion less in revenue. And that trickled down all the way to the bottom line, contributing to a 17% drop in earnings per diluted share, to $0.34.
Still, if you take out items such as purchase accounting adjustments, acquisition costs, and "certain significant items," EPS came in at $0.48, a penny ahead of Wall Street estimates. Way to go!
Those analysts sure nailed it, didn't they?
The business of managing expectations
Of course they did. After all, Pfizer provides guidance on:
- Revenue
- Adjusted costs of sales
- Adjusted selling and administrative expenses
- Adjusted research and development expenses
- Adjusted other additions or deductions
- Effective tax rate
- Both reported and adjusted EPS
Gee, that looks like every major category of the income statement to me. With such an extensive company-provided cheat sheet, how could analysts ever get it wrong?
The real question, though, is whether Pfizer, Wall Street analysts, and investors should rely so heavily on those "adjusted" numbers. Clearly, investors like what they're seeing; the stock rose more than 1% yesterday following the earnings report, and was up even more sharply in today's session.
But I don't like that "certain significant items" includes such things as "major non-acquisition-related restructuring charge[s]" which Pfizer announced just a couple of quarters ago, "sales of products or facilities that do not qualify as discontinued operations," and "certain intangible asset impairments" or amortization. To me, it's beginning to look as if company executives are cherry-picking what to include in the numbers they want everyone to pay attention to.
Look past the adjustments
Listen up, Fools. Looking past currency fluctuations can be an important way to see how a business is faring. And Pfizer is doing all right on that front.
But generally accepted accounting principles, for all their faults, are meant to provide transparency in the reporting of results by the companies in which we invest. And that means the cost of doing business includes the cost of things like "non-acquisition-related restructuring." When management starts throwing around things like "adjusted this" and "don't include that," turn up your skepticism meter and take a deeper look. Then decide if you really want to invest in that company.
What do you think? Please share your comments below.
