TAKING STOCK

Pfizer down but far from out

by Malcolm Berko

Dear Mr. Berko:

Ever since Pfizer got below $22 a share I've been thinking that I would buy 200 shares; now I'm afraid to buy the stock. Please give me your thinking on this good drug company that yields a very good 6.1 percent. I'm 48 years old, been with the post office for a long time (26 years) and if I bought Pfizer it would also be a longtime investment. But when push comes to shove, it seems that I chicken out

R.T.
Waterloo, Iowa

Dear R.T.:

You and lots of others have a form of post-traumatic stress disorder, which on Wall Street is known as TSMP, or temporary stock market paralysis. It's a widespread, pervasive symptom of these times.

Pfizer Inc. (PFE-$20.90) down from the mid-$40s in 2002, has a severe case of low blood pressure even though the board raised the dividend to $1.28 providing new investors with a lovely 6.1 percent yield. PFE is among the extremely rare companies that have increased its dividend each year since 1975.

Meanwhile, PFE has been carefully purchasing new technologies with an eye toward long-term profits. This year PFE bought Coley Pharmaceuticals, a bio-therapeutic research company with specific interests in immunotherapy. PFE also bought CovX Research, another bio-therapeutic company that focuses on preclinical oncology and metabolic research. PFE purchased Serenex, which has potential treatments for solid cancer tumors and hematological malignancies and Encysive Pharmaceuticals that makes molecule compounds for cardiovascular, vascular and related inflammatory diseases.

These four acquisitions, completed during the first three months of 2008, plus planned future acquisitions are indicative of management's emphasis to build a biotech business and expand its pipeline. This year PFE expects revenues to come in at about $49 billion, slightly more then they were in 2007. But expected 2008 earnings of $2.35 will be about 15 percent higher than 2007 earnings of $2.06 a share. So it's reasonable to expect the board to increase the dividend again this year to perhaps $1.36 from $1.28.

Meanwhile, net profit margins continue to improve and at 30.5 percent they are the highest in the company's history. And so is free cash flow per share, which has steadily grown to $2.95 last year from 25 cents a share 20 years ago.

I'm particularly impressed that PFE's revenues grew by 4.1 percent last year considering the intense competition for its blockbuster antidepressant Zoloft and its popular cardiovascular drug Norvasc. I'm also encouraged that sales of PFE's cholesterol-fighter Lipitor grew by 2 percent, which signals the beginning of the drug's stabilization against the onslaught of the generic Zocor.

I'm also impressed that new drugs such as Sutent (oncology), Chantix (smoking cessation treatment) and Lyrica, (the only Food and Drug Administration-approved drug for the treatment of fibromyalgia pain) are filling the void left by PFE's various patent expirations. Management expects these three prescriptives to grow at double-digit rates for the foreseeable future.

And I'm impressed with the new chief executive officer, Jeff Kindler. So far, he has reduced PFE's head-count by 11,000, shuttered six manufacturing sites, lowered long-term debt, reduced capital costs and closed three research and development facilities.

Revenues rank PFE as the largest pharmaceutical company in the world, which provides impressive economies of scale. Pfizer also has big bucks ($22 billion in cash) to crank the research power that supports continued development of new drugs, the growth lifeline for every pharmaceutical company. Certainly this why Pfizer has 158 drugs in its fecund pipeline, which has generated 15 new drug

approvals since 2004. Several of these new drugs could easily be billion-dollar blockbusters in the coming years.

PFE's $10 billion in annual cash flow, its extremely impressive sales force, its streamlined operations and its high return on capital provide the company with significant marketing edge and a wide economic moat around its business.

Now I don't expect the stock to outperform the market in the near term; new management still has to smooth out bumps and grinds on its road to the future. But that road at today's pace should be safe and comfortable to drive with a 6.1 percent dividend to cushion against most of the potholes.

Value Line believes PFE could be a $40 stock in the next two to three years, so do Morningstar, UBS as well as the analysts at Fidelity, Vanguard and Capital Research. I believe that Lehman, Prudential, Sanford Bernstein and Merrill may upgrade their recommendations of PFE to "buy" later this year. So I suggest that you jump on the bus while there are good seats left.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net.