Topic of the week was the plunge of Pfizer.
Since the stock is the darling of many value investors we will focus on it on this issue of the Value Investor Weekly Reading List.
The company stopped clinical trials of torcetrapib. This anti cholesterol drug was supposed to replace Lipitor which represents 25% of drug maker sales. Suddenly Pfizer drug pipeline seems rather dry.
At the end of the column we will submit you also an interesting value play, an intriguing story on analogy between investing and gambling and an entertaining and instructive Warren Buffett video.
First let's talk about Pfizer.
How the failure materialized ? Only two statistically abnormal deaths, in a clinical trial involving 15.000 patients (i.e. 0.02% of the sample), triggered the threesold which, almost on automatic pilot, forced Pfizer to stop the trial.
The Economist explains why the drugs industry may shares many of Pfzer's problems.
Fortune wonder if after the torcetrapib failure it is a good idea to outsource early stage drugs research and development .
Robert Stever at TheStreet.com sum up the long term revenue and earnings consequences of torcetrapib failure.
The Wall Street Journal reminds here that despite heavy losses suffered by investors and flat revenues expected by management for the next couple of years Pfizer still has hefty resources available. The recent cut of 20% of U.S. sale force will save $400 million a year. After receiving money from the sale of its consumer-products unit to Johnson & Johnson next month, Pfizer will have $34 billion (yes, billion with a "b") in cash. It may be enough to finance a successful turnaround.
The BreakingNews column , at the end of a gloomy article, point out that the company is expected to have a free cash flow after dividends of $10 billion next year.
Is the new Pfizer CEO nominated last July fitted to lead the turnaround ? Wall Street Journal has a positive column on him and list challenges which are facing the drug giant.
Jeffrey Kindler is an "inside outsider". He joined Pfizer in 2002 as general counsel and didn't have a previous experience in the pharma industry. He knows enough about the company to understand what need to be changed but he isn't "steeped in the company's and the industry's creaky traditions". Last but not least "until the stock goes up 50% from where it was when he took office (around $26) Mr. Kindler's stock options are worthless".
What should do investors with Pfizer stock ?
The Peridot Capitalist makes a strong case to hold on Pfizer . According to him it should be, at worst, a cash proxy yielding 4-5%. Any extra cost cutting efforts, positive surprise on remaining pipeline, smart acquisition or dividend boost can provide an attractive upside.
On the other side Marek Fuchs on TheStreet.com presents the bear case.
Investopedia explains how to evaluate drug makers .
Money Magazine provides three strategies for health care investing after the Pfizer flop.
And now an interesting value play.
Jim Clarke in an interview with Value Investor Insight suggest to have a look at Cavalier Homes (CAV). This manufactured house maker fetching $73 million market cap has a strong balance sheet. It still makes money in an industry at a 40-year low with only half of its plants operating. Downside is limited. If you apply to Cavalier Homes the multiple Warren Buffett paid for a competitor the stock has at least a 20% upside.
Vitaly Katsenelson relate a real life story which shows the similarities between successful gambling and successful investing.
Warren Buffett is in a great shape in this video of a speech to University of Florida students. Funny and insightful.
12/11/2006
12/07/2006
A Few Thanks
We started publishing this blog on Sept. 15th 2006, three months ago only.
Beyond our most rosy expectations one of our posts regarding Pfizer has been mentioned yesterday by the Bible of investing blogs, the daily Blog Watch written by James Altucher on TheStreet.com website.
He has been certainly excessively generous in quoting us among first league investing blogs that we discovered reading his column. We are taking this mention as an encouragement to do more and better.
Mick Weinstein, the Editor-in-Chief of SeekingAlpha, deserves also a special mention in this "thank you" post. His website has been our first occasion to reach a broad audience and he has demonstrated a boatload of patience in correcting our posts.
A final "thank you" goes of course to our readers. The only fact that they pick our posts among hundreds of investing news sources and pay their attention to our research for a few minutes is our biggest reward. Their comments and suggestions are always welcome.
Beyond our most rosy expectations one of our posts regarding Pfizer has been mentioned yesterday by the Bible of investing blogs, the daily Blog Watch written by James Altucher on TheStreet.com website.
He has been certainly excessively generous in quoting us among first league investing blogs that we discovered reading his column. We are taking this mention as an encouragement to do more and better.
Mick Weinstein, the Editor-in-Chief of SeekingAlpha, deserves also a special mention in this "thank you" post. His website has been our first occasion to reach a broad audience and he has demonstrated a boatload of patience in correcting our posts.
A final "thank you" goes of course to our readers. The only fact that they pick our posts among hundreds of investing news sources and pay their attention to our research for a few minutes is our biggest reward. Their comments and suggestions are always welcome.
12/04/2006
Pfizer: Value Investors Saved By Margin Of Safety
Rule no.1: if a company is doing fine, look at the balance sheet.
Rule no.2: if a company is in trouble, see Rule no.1.
(Value Investor Blog)
Pfizer, the world leading drug maker has find a place in many of the major value managers portfolios. According to GuruFocus website here is a table of the most famous investors involved :
Two main reasons convinced them (and us) to invest in Pfizer stock: historical low P/E multiples and a AAA graded balance sheet. The latter is most important for us. Pfizer has about $14 billion cash and short term investments and only 8 billion of short and long term debt. One of the strongest balance sheet in big pharma industry with a debt to equity ratio of 0.116.
Balance-sheet is almost always overlooked by stock analysts but same is paramount to protect your investments value even in case of disaster.
And the company faced a true disaster yesterday. Few days after an analyst meeting with a very positive tone on their drug pipeline, following an abnormal death statistics of some patients under clinical trial, Pfizer decided yesterday to stop trials of the anti-cholesterol drug torcetrapib.
This sudden and unexpected stop is a major drawback for the company future since torcetrapib was supposed to replace Pfizer best selling drug, Lipitor which patent expires in 2010. In the last twelve months Lipitor were amounting to about a quarter of all Pfizer sale which suddenly have barely no replacement within four years.
What would have happened to a more levered company ? An immediate crash of 20/30% would have been in the cards.
In the case of Pfizer the balance sheet strength freeze somehow the slide. Ample cash at disposal allow management to put a floor on stock quote by:
- increasing dividend (already at 3.40%);
- buying back shares;
- investing in drug pipeline developed by other companies.
In fact, despite abysmal news, stock is presently trading at $24.71, at "only" 11.30% less than yesterday close of $27.86.
So what to do with stock now ?
We sold our 50% position bought at $24.79 in December 2004 at 2.6% loss. Including dividend the investment has been barely positive.
According to Value Investor Blog the main danger is now that cash on hands will be used to buy missing pipeline at an hefty price either by purchasing drugs from other pharmaceuticals companies or by merger and acquisitions operations at unfavourable terms for current Pfizer shareholders.
We must admit however that sofar the new CEO, Jeffrey Kindler, impressed us in his first months of tenure. He is aggressively cutting costs to adapt Pfizer structure to stagnant revenues and he has expressed a strong commitment on dividend increase shares buyback.
If he will start to do right moves to solve the poor Pfizer research and development productivity using wisely cash in hands Pfizer can become an attractive investment again. If balance sheet remains strong, of course.
Investors already long the stock may keep in hands at least part of their position and wait for a turnaround in the company pipeline while cashing a juicy dividend. The risk is that Pfizer will become dead money for a few years.
According to us rock bottom of stock quote is limited $20-21 / share if no major negative event impact the company. At this level we would consider again buying the stock.
Disclosure: at the time of posting the author did not have a position in stock mentioned in the post.
Rule no.2: if a company is in trouble, see Rule no.1.
(Value Investor Blog)
Pfizer, the world leading drug maker has find a place in many of the major value managers portfolios. According to GuruFocus website here is a table of the most famous investors involved :
| Ticker | Guru Name | Portfolio Date* | Current Shares | % of Total Assets | Change from Last Holdings |
| 2006-09-30 | 5,871,000 | 6.56% | -0.03% | ||
| 2006-09-30 | 7,454,663 | 6.49% | 3.43% | ||
| 2006-09-30 | 27,392,094 | 3.18% | -78.54% | ||
| 2006-09-30 | 3,187,325 | 2.72% | 0.69% | ||
| 2006-09-30 | 16,426,784 | 2.66% | 12.09% | ||
| 2006-09-30 | 45,528,520 | 2.27% | -17% | ||
| 2006-09-30 | 17,611,570 | 2% | -37.13% | ||
| 2006-09-30 | 335,000 | 1.67% | 0% | ||
| 2006-09-30 | 9,964,000 | 1.29% | -0.36% | ||
| 2006-09-30 | 296,500 | 0.48% | 42% | ||
| 2006-09-30 | 69,568 | 0.02% | -41.4% | ||
| 2006-09-30 | 88,413 | 0.02% | -12% | ||
| 2006-07-31 | 2,000,000 | 0.87% | 0% | ||
| 2006-06-30 | 12,200,000 | 1.53% | 6.03% | ||
| 2006-06-30 | 208,800 | 0.73% | 91% |
Two main reasons convinced them (and us) to invest in Pfizer stock: historical low P/E multiples and a AAA graded balance sheet. The latter is most important for us. Pfizer has about $14 billion cash and short term investments and only 8 billion of short and long term debt. One of the strongest balance sheet in big pharma industry with a debt to equity ratio of 0.116.
Balance-sheet is almost always overlooked by stock analysts but same is paramount to protect your investments value even in case of disaster.
And the company faced a true disaster yesterday. Few days after an analyst meeting with a very positive tone on their drug pipeline, following an abnormal death statistics of some patients under clinical trial, Pfizer decided yesterday to stop trials of the anti-cholesterol drug torcetrapib.
This sudden and unexpected stop is a major drawback for the company future since torcetrapib was supposed to replace Pfizer best selling drug, Lipitor which patent expires in 2010. In the last twelve months Lipitor were amounting to about a quarter of all Pfizer sale which suddenly have barely no replacement within four years.
What would have happened to a more levered company ? An immediate crash of 20/30% would have been in the cards.
In the case of Pfizer the balance sheet strength freeze somehow the slide. Ample cash at disposal allow management to put a floor on stock quote by:
- increasing dividend (already at 3.40%);
- buying back shares;
- investing in drug pipeline developed by other companies.
In fact, despite abysmal news, stock is presently trading at $24.71, at "only" 11.30% less than yesterday close of $27.86.
So what to do with stock now ?
We sold our 50% position bought at $24.79 in December 2004 at 2.6% loss. Including dividend the investment has been barely positive.
According to Value Investor Blog the main danger is now that cash on hands will be used to buy missing pipeline at an hefty price either by purchasing drugs from other pharmaceuticals companies or by merger and acquisitions operations at unfavourable terms for current Pfizer shareholders.
We must admit however that sofar the new CEO, Jeffrey Kindler, impressed us in his first months of tenure. He is aggressively cutting costs to adapt Pfizer structure to stagnant revenues and he has expressed a strong commitment on dividend increase shares buyback.
If he will start to do right moves to solve the poor Pfizer research and development productivity using wisely cash in hands Pfizer can become an attractive investment again. If balance sheet remains strong, of course.
Investors already long the stock may keep in hands at least part of their position and wait for a turnaround in the company pipeline while cashing a juicy dividend. The risk is that Pfizer will become dead money for a few years.
According to us rock bottom of stock quote is limited $20-21 / share if no major negative event impact the company. At this level we would consider again buying the stock.
Disclosure: at the time of posting the author did not have a position in stock mentioned in the post.
12/03/2006
Value Investor Blog Weekly Reading List
Every week we will list columns, blog posts, mutual funds shareholder letters and research papers which can be of interest to value investors.
Feel free to send your own readings ideas using the blog comments.
Here is today the first issue today for the VIB Weekly Reading List for the week ending Dec. 3rd.
Investopedia column on Overcoming Compounding's Dark Side is a clear illustration backed by few simple examples of Warren Buffet famous quote: "The first rule is not to lose. The second rule is not to forget the first rule".
Jim Cramer explains how to be a contrarian . I'm not a big fan of his kind of "contrarianism" which is based almost exclusively on short term analyst earnings expectations. Though we are not brothers in our investing process we may somehow cousins after all.
Associated Press have a look at the stagnant paper industry . Sentiment is poor and Wall Street, as usual, discounts present poor prospects in the future. After stock market euphoria starting last summer this is one of the few industries where you may still find some interesting value or deep value candidates.
Bill Cara has an interesting comment on whole stock market valuation . We share his prudence though huge flow of private equity and leveraged buyout money together with a benign economic environment still provide some kind of support to stock market.
Nicholas Yulico, a reporter at TheStreet.com, writes a textbook of analysis of BJ's Wholesale Club (BJ) . It's a pitty that same has been published only about ten days after a 9% spike on the stock.
His insightful column demonstrates that it's a good idea to concentrate your research a bit more on balance sheet items and a little bit less on the cents and pennies per share on the quarterly earnings figures.
At VIB we believe that discovering under rated balance sheet items provides at the same time a margin of safety on your investments and above average returns.
Feel free to send your own readings ideas using the blog comments.
Here is today the first issue today for the VIB Weekly Reading List for the week ending Dec. 3rd.
Investopedia column on Overcoming Compounding's Dark Side is a clear illustration backed by few simple examples of Warren Buffet famous quote: "The first rule is not to lose. The second rule is not to forget the first rule".
Jim Cramer explains how to be a contrarian . I'm not a big fan of his kind of "contrarianism" which is based almost exclusively on short term analyst earnings expectations. Though we are not brothers in our investing process we may somehow cousins after all.
Associated Press have a look at the stagnant paper industry . Sentiment is poor and Wall Street, as usual, discounts present poor prospects in the future. After stock market euphoria starting last summer this is one of the few industries where you may still find some interesting value or deep value candidates.
Bill Cara has an interesting comment on whole stock market valuation . We share his prudence though huge flow of private equity and leveraged buyout money together with a benign economic environment still provide some kind of support to stock market.
Nicholas Yulico, a reporter at TheStreet.com, writes a textbook of analysis of BJ's Wholesale Club (BJ) . It's a pitty that same has been published only about ten days after a 9% spike on the stock.
His insightful column demonstrates that it's a good idea to concentrate your research a bit more on balance sheet items and a little bit less on the cents and pennies per share on the quarterly earnings figures.
At VIB we believe that discovering under rated balance sheet items provides at the same time a margin of safety on your investments and above average returns.
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