Pfizer Inc. (PFE)

SSG and PERT A (07-21-2005) | Google “Stocks: PFE” | Company Website

The stock selection guide for Pfizer has been updated to reflect Q2 earnings. Using a 5-yr projected revenue growth of 6.5% and consevative PEs (high PE of 22 and low PE of 12.5), the projected average return ofor the next five years is 18.1%. PFE remains a high quality stocks and is a buy up to $32.70.

Comments from April 9, 2005

We bought some additional shares of Pfizer (PFE) on March 24. PFE is a high quality company with a potential average return over the next five years of more than 20%.Quality. There is no question that PFE is a high quality company. Its balance sheet is rated AAA. Value Line rates its financial strength as A++ and earnings predictability as 100, both their highest ratings. It spends more than $8 billion each year on R&D.

Growth. This parameter is perhaps the most difficult to estimate. Revenue growth projections by the “experts” range from 2% (Morningstar) to 10% (Value Line). Historical revenue growth for the past ten years has been about 11%. The attached SSG uses the Value Line revenue projection of 10%.

Assuming 10% revenue growth (along with a 32.1% pretax margin and a 22.5% tax rate), the 5-year EPS would be $3.17. This reflects a 12.2% EPS growth rate. For comparison, First Call median EPS growth is 8% and Value Line is 13.5%.

Valuation. Since PFE is a high quality company and dominant in its market, PFE has always commanded relatively high PEs (e.g., 2 x its growth rate). Assuming an average future PE of 19, PFE’s price in five years would be (19 x $3.17) $60.23. This means a price appreciation of 17.7%. In addition, PFE currently pays a 2.9% dividend. Thus the total return to an investor who purchases PFE today would be over 20% — if the above assumptions are correct. PFE is a buy up to $38.70.

What Others Are Saying.

Investors Advisory Service has PFE as buy up to $39. In the February edition, IAS notes: “Money runs from uncertainty and the price of Pfizer stock has been pushed down. However, we still judge that Pfizer is the best positioned in terms of product as well as being the largest and most financially secure company in the pharmaceutical industry. The company has some twenty products in the pipeline and we do not see that its future will depend on just one or two products. We feel the present offers an excellent opportunity to buy a very high quality company at a reasonable price, although it may well be quite some time before the price of the stock moves forward.”

Morningstar rates PFE as a four star stock with a wide moat. Assuming 2% revenue growth, Morningstar concludes that fair market value is $32.00. Note: Morningstar’s revenue projection of 2% seems very low and skews its results.

Company Description

Pfizer Inc. is a major producer of pharmaceuticals, hospital products, consumer products, and animal health lines. Important product names include, Norvasc (cardiovascular); Zoloft (antidepressant); Zithromax (antibiotic); Lipitor (cholesterol); Aricept (Alzheimer’s); Cardura (cardiovascular); Diflucan (antifungal); Zyrtec (antihistamine); Viagra (impotence); Celebrex/Bextra (rheumatoid arthritis and osteoarthritis). Int’l business, 41% of sales; R&D, 15.8%. ’03 depreciation rate: 6.1%. Estimated plant age: 17 yrs. Has about 122,000 employees, 147,000 stockholders. Directors/ Officers own less than 1% of stock (3/04 proxy). Chairman & Chief Executive Officer: Henry McKinnell. Inc.: Delaware. Address: 235 East 42nd Street, New York, NY 10017. Tel.: 212-573-2323.