An Undervalued Blue Chip
The Dynamic Wealth Report
November 7, 2008
My Favorite Drug Company
by Brian T Mikes, Managing Editor
Last Saturday morning I was sitting at the breakfast table reading the
paper. For me, it’s always the business section first. The news was
nothing new. The same old rehashed commentary on the performance of the
markets.
I don’t need anyone to tell me October was a horrible month. I can see
it in the charts.
You’ll note from peak to trough we lost almost 2,500 points on the Dow
Jones Industrial Average. Despite the rally the last week of the month,
it’s still one of the worst months on record.
Despite the doom and gloom, I see a bright side to this.
It’s a great opportunity to buy value stocks at a deep discount. Think
of it this way. There’s several types of investors. Two big groups are
growth investors and value investors. Depending on the type of market
we’re in, one group will outperform the other.
Right now, it’s the value investor’s time to shine.
How do I know? Simply by the state of the market. Look at values. Stocks
have been crushed. Valuations are down big. P/E ratios are
at new lows. Dividend yields are at new highs. It all points to buying undervalued
stocks at a discount . . . finding stock prices unjustifiably low.
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That’s how I found my favorite Drug Company.
Let me say this. I really like this company. So much so I bought it for
my own account. Am I expecting an overnight homerun? No. I like this as
a longer term investment. Something I find attractive at these valuation
levels.
So, who’s the company? Pfizer (PFE).
I know what you’re thinking . . . that company’s a dog. The stock's down
more than 20% from the start of the year. They have major drugs going
off patent. They’re struggling to develop new drugs for the major
markets.
Yes, yes, and yes. All valid points.
But hear me out. Pfizer suffers from many of the same problem other drug
companies face. Pfizer’s key drug Lipitor goes off patent in 2011. You
either use this drug yourself or know someone who does (I have several
family members taking it regularly). It’s a great cholesterol lowering
drug. And a profitable one at that.
Amazingly, Lipitor accounted for more than $3.1 billion in sales last
quarter.
Let’s look ahead. Pfizer has a number of other drugs steadily growing in
market share: Lyrica, Celebrex, Viagra, Sutent, Xalatan, Zyvox and
Geodon. These alone account for almost another $3 billion in sales.
The company’s also spending millions on R&D to expand their drug
pipeline.
In addition, management’s aggressively cutting costs. Aggressive might
be a bit of an understatement. They’re anticipating costs reductions of
more than $2.0 billion dollars. It’s music to my ears.
Management seems to be feeling good about the prospects of the company. They tightened guidance with 2008 revenue being in the $48 to $49
billion range. They’re expecting Adjusted EPS to be $2.36 to $2.41 and
Cash Flows from Operations of $17 to $18 billion.
All great numbers.
But here’s a number I like. 41 – it’s the number of consecutive years
the company’s increased their dividend. In the last 10 years alone, the
dividend increased an average of 18% per year. Not bad if you ask me.
Want to hear a better number . . . 280. When the company pays its
dividend in December it will represent the 280th consecutive dividend to
shareholders. (that’s 70 years!)
Right now the stock’s undervalued. It trades at just over 7 times next
year’s earnings. The company posts an amazing 7% yield from its dividend
(the five year average is just over 3%). They have more than $26 billion
in cash and short term investments. In addition, they’re expecting
operational cash flow of more than $17 billion this year.
I love this company as a long term investment. I think it’s one to buy
and hold for the next 70 years.
• Whole Foods (WFMI) was upgraded to “Hold” at Jeffries &Co. I find
it strange that an analyst would upgrade a consumer company, given the
state of spending in the US.
• McDermott (MDR) was downgraded by Credit Suisse and Jeffries. The
reasoning . . . The company’s costs were increasing and oil and gas
projects were less certain.
• Jesup & Lamont started research coverage on a number of the airlines
including: Alaska Air (ALK), AMR (AMR),
Delta Air (DAL), Jetblue (JBLU),
Southwest (LUV), and UAL (UAUA).
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