March 25, 2014 - 3:40pm EST by
2014 2015
Price: 31.85 EPS $0.00 $2.25
Shares Out. (in M): 6,533 P/E 0.0x 14.1x
Market Cap (in $M): 209,000 P/FCF 0.0x 0.0x
Net Debt (in $M): -8,300 EBIT 0 0
TEV (in $M): 200,700 TEV/EBIT 0.0x 0.0x

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  • Pharmaceuticals
  • Share Repurchase


let's get this straight up-front - I'm no expert on this company.  For those of you who do back-breaking research and post such wonderful things on this board, I salute you and very much admire your work.  Occasionally I have also profited from your ideas too, and for that I am 10x grateful.  But you have to understand, your skills are not mine, and I don't have the training, intelligence, and IQ to match you.  What I do is look for patterns, and usually if I see a pattern seen before more times than more often than not it tends to work out. 
But when I research ideas, I generally probably only focus on 10% of the things other people find important (esp hard ideas like this one).  Mainly that's cause I bore easily, I don't think I add much value in many circumstances (so what's the point of more work?), and I'm willing to have a lot of faith if the Balance Sheet looks the way I like and the CFFO statement seem to indicate a whole lot of good is going on.  Plus, I don't have the time or resources to investigate like you do.  In a stalwart like this one in particular, the vast majority of my "research" is centered on other people's work too - it is only the conclusion that may differ radically.  So if you ask me detailed questions on this idea - most especially this idea - then most likely I'm not going to not have a good answer for you. 
That said - What i look for in a stalwart is a) financial strength, b) a reasonable PE or FCF yield based on forecasted future earnings, and c) a business which seems to misperceived in some way.  Or, as BG states, "an unpopular large company".  As an example, a few years ago at JNJ the perception was that mismanagement in consumer and issues in devices/pharma patents meant the company deserved a 12ish type multiple - permanently.  I thought that consumer would be fixed (eventually - still ongoing but less of a headline issue), patents would resolve with time (as the impacted drugs went Ex which allows a focus on the future), and that good things could happen with their BS.   That is pretty much how it played out (with a device acquisition that at least showed that JNJ seemed to want to actually grow their earnings), helped by happy market.  My analysis was not any more detailed than that - basically noting that analysts had formed an opinion that changing evidence would alter.
So...I am recommending PFE for a well-defined 20 to 30% return in an 18-24 month time frame. 
I like PFE for the following reasons:
*the BS is pretty.  Company has 32.4b in cash and investments with another 12.4m in long-term investments with 6.027b in short-term debt and 30.462b in long-term debt.  This is a net 8.3b in cash and investments.  
*the dividend yield is notable.  PFE pays $1.04 in dividends. That's a nice 3.3% yield.  Other than a brief time end of the world Lipitor is passing in 2008-2011, the dividend is usually raised each year.
*the company will buy shares.  PFE purchased 16.3b last year, 8.3m year before, and 9.0 in 2011.  Plan for 2014 is for 5b.  They obviously have room for FAR more.  A lower stock price would most definitely be welcomed too to make the buyback more effective.
*the company generates a huge amount of FCF.  Trailing numbers are distorted by the Z disposition and other matters, but if you use the company's forecasted EPS estimate for this year at $2.20-2.30 adjusted, you get 6.4 x 2.25 or 14.4b.  D/a seems to be 1.5b per Q, so ni + da is 20.4.  For past 3 years, PPE was roughly 1.4b.  Intangible purchases were 191m on average.  The company does make acquisitions.  But if you exclude them, PFE could be expected to generate FCF (ni + da - PPE and intang) of 18.8b, or roughly a 9% yield in market cap.  Better on EV.
*the PE and FCF yield are attractive.  PE based on $2.25 adjusted is 14.1x.  This for a company that generates a cash flow return almost 20x higher than PPE requirements.  As noted above, the FCF yield is very attractive, and management pays most out by dividends/buybacks.  Today is March though, and eventually thoughts will turn to 2015.  While I don't expect much growth yoy (see below), I am hopeful that the company can modestly increase it earnings in 2015 resulting in slightly better numbers with more cash on the BS.
*the stock is exceptionally liquid and easy to trade.  You aren't a prisoner and the tide usually ratchets this higher assuming a normal market.  It could appear in virtually any portfolio in many quantities allocation wise. 
Of course, this company has some obvious negatives
*Celebrex.  Roughly 5% of sales, the drug goes off-patent this year. 
*Other drugs.  Another patent cliff comes in 2015 (Enbrel overseas and Zyvox) - so 10% of sales is at risk after that.  Other drugs roll off as is the norm in this industry (see 10k).
*Further declines in Lipitor and off-patent drugs.  Fwiw, even after losing its patent Lipitor still did 2.3b sales last year.
*currency issues.  Per VL international accounts for 61% of sales.
*top line issues.  As listed above, most folks think that PFE would do well to simply keep the top line static for the next couple years.  This will come from existing drugs in the pipeline (see presentations from the company - most recent was from Citi Global), acquisitions, and partnerships.  I've seen some analysts project that top line may be challenged for a decade (1% projection).  So clearly as currently constituted PFE is not a growth company on the top line.  But I figure that the 6b they pay in RD like in 2014 will yield enough things to offset the challenges.
*do you believe in adjusted numbers.  Latest adjust numbers exclude things like purchase accounting but also restructuring and implementation charges.   You will have to make you own conclusions as to what to believe but I usually take the adjusted numbers at face value in big companies like this.
*Janet Yellen.    Higher rates would obviously decrease the attractiveness of a company like this but it would have to be much higher rates - in which case a lot of things will reset.
So, to answer my tiny checklist
- Is there financial strength?  Overwhelming so.
- is there a reasonable PE or FCF yield based on forecasted earnings?  Yes, definitely.
- Is there a business here misperceived by the market in some way?  Yes.  No, it isn't a growth company top line.  And no, you can't build castles in the sky here cause PFE makes money.  And yes, there are challenges past, present and future that a casual read of the 10K make obvious.  But I believe the price more than discounts these issues, and the stock could easily be re-rated as the Lipitor cliff issue recedes into memory and they restock current drug patent drugs going ex with new drugs.  And with their BS, PFE has a lot of options.  A LOT of options.  Even if CFFO drops 10% a year, PFE generates 48-50b in cash flow in the next three years, and that gives them a LOT of options.  The company has also made several shareholder-perceived friendly actions too with various spins like Z and nutrition.  More are speculated.
Z = Zoetis 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


Investors attracted to lower price stalwarts with high dividends, considerable free cash flow, and lots of options.
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