Pfizer Inc. (NYSE:PFE) is up 5% over the last month and is now making a push towards a $200 billion market capitalization. The large drug manufacturer gets much of its value from its prescription drugs but also sells animal health products (a potential spinout in 2013) and non-prescription drugs such as Advil. The second quarter of the year was a challenge for Pfizer: revenue was down 9%, led by declines in the primary care business (which includes drugs prescribed by primary care physicians, such as Lipitor and Viagra).
The accompanying cost-cutting program at Pfizer Inc. was impressive, and as a result the company actually increased its net income from $2.6 billion in the second quarter of 2011 to $3.3 billion in the same period this year. However, Pfizer accomplished this mostly by reducing research and development expenses from $2.2 billion to $1.7 billion. Thinking of the company as having to maintain R&D in order to sustain its revenue in the future, or thinking of earnings plus R&D as a useful metric for technology-oriented companies, then it looks like Pfizer was only able to establish a small increase in its business.
Wall Street analysts look extremely bullish on Pfizer Inc. Their consensus for 2013 implies a forward P/E multiple of 11, down from the 19 figure that arises from comparing the stock’s valuation to trailing earnings. Pfizer is also an attractive defensive stock: its beta is 0.7, meaning that despite its large size it tends to fluctuate less than the broader market does in response to economic conditions, and it pays a dividend yield of 3.4%.
Possibly because of these attractive characteristics and the investor skepticism regarding the U.S. and global economies that reigned in the second quarter of the year, Pfizer made our list of the ten most popular stocks among hedge funds based on 13F filings that disclosed positions as of the end of June (see our full rankings). Rob Citrone’s Discovery Capital Management was one hedge fund with a large position in the stock; Discovery increased the size of its position in Pfizer by 48% over the course of the quarter (see more stock picks from Discovery Capital Management). Citrone is a Tiger Cub, having been a portfolio manager at Tiger Management. Billionaire Ken Fisher’s Fisher Asset Management reported over 22 million shares of Pfizer in its own portfolio (find more stocks owned by Fisher Asset Management).
Pfizer can be compared to Merck & Co., Inc. (NYSE:MRK), Novartis AG (NYSE:NVS), Sanofi SA (NYSE:SNY), and Bristol Myers Squibb Co. (NYSE:BMY). Merck and Novartis have similar spreads between their trailing and forward P/Es; respectively, they trade at 21 and 18 times trailing earnings and 11 and 12 times their expected earnings for 2013. So all three of those companies- including Pfizer- have similar valuation multiples. Merck and Novartis have slightly higher dividend yields, with Novartis’s being the highest at 4%, though that it is not a particularly big gap either. Finally, the businesses at those two peers seemed to have been about flat in the second quarter versus the same period in 2011. With not much difference in terms of valuation statistics, investors are generally free to pick the product composition they prefer.
Sanofi’s forward P/E is 12, but it starts out a bit lower priced than the other pharmaceutical companies at a trailing P/E of 14. Earnings were 16% higher last quarter over a year earlier, generated largely by higher margins but also by slightly higher revenues. With a high dividend as well, it has a noticeable discount and its business is doing well. Bristol Myers Squibb, meanwhile, suffered double-digit percentage declines in both revenue and earnings, carries a trailing P/E of 16, and its dividend yield is again only slightly higher than average for this peer group at 4%. We don’t think it is a good buy.
Pfizer, Merck, and Novartis all seem about even unless there are particularly attractive points contained in their product lines. However, we’d also encourage investors to take a close look at Sanofi based on its valuation.
